How to Choose the Right Retirement Plan for Your Small Business


An attractive benefits package is an integral part of every small business owner’s talent acquisition and retention strategy. New research finds workers rank retirement plans fifth on the list of perks they prefer to an increase in salary. Despite that, many business owners assume the costs involved are too high, and the plans are too time-consuming to implement. However, the key is to find the right plan for your business. To that end, compiled below is a list that defines and explains the most popular options for small businesses.

Here are six of the most suitable retirement plans for small businesses

Simplified Employee Pension (SEP) Plans
As its name suggests, the SEP is the simplest type of retirement plan available to small business owners. Relative to other plans, it is easy to set up and administer and generally has no filing requirements for the employer. Start-up and operational costs are lower than a conventional plan, and contributions are tax-deductible. Annual contributions are flexible, which can be helpful for the early years of a startup where profits are unpredictable. You can contribute more in boom years, and dial back when things slow down. However, business owners should be aware that contributions to employee plans are funded entirely by the employer and the amount you contribute must be the same for each employee. As a further point to consider, the percentage contributions you make to your employees’ plans must match the percentage contributions you make to your own. SEPs are equally appropriate for solopreneurs, as you can set one up without any employees.
Suitable for: Small businesses that might have fluctuating or seasonal sales cycles or that are just starting out.

SIMPLE (Savings Incentive Match Plan For Employees) IRA Or 401(k)
This is a solid option for early-stage companies before they reach 100 employees. Choose between either a SIMPLE 401(k) or IRA. Regarding employer contributions, you have two options: match employees’ contributions (up to 3 percent of each individual’s pay) or pay an “across-the-board” 2 percent contribution, regardless of whether the employee makes any contributions themselves. Depending on the specific plan, employees over the age of 50 may be able to make “catch-up contributions.” Check with the IRS for current contribution limits.
Suitable for: Business owners with no more than 100 employees.

Safe Harbor 401(k)
A Safe Harbor 401(k) benefits all eligible employees, regardless of salary. Unlike traditional 401(k) plans, they aren’t subject to annual contributions testing, which requires plan sponsors to ensure contributions made to standard employees are comparable to highly compensated employees. However, employers must meet certain requirements, including providing a minimum contribution for each employee, regardless of the employee’s own retirement contributions.
Suitable for: “Small businesses with seven to eight highly compensated individuals” can benefit from these plans.

Solo 401(k)
Also known as an individual 401(k), this plan is an affordable option for a business with no employees other than the owner and their spouse. It’s a tax-deferred plan, so you don’t pay taxes on contributions or earnings until you withdraw money. Contributions are discretionary. Catch-up contributions for those over 50 are also permitted.
Suitable for: Business owners and spouses who plan to invest significant cash sums.

Defined Benefit Plan
Small business owners often combine defined benefit plans (also referred to as a traditional pension plan) with a Solo 401(k) or an SEP. Contributions can be written off as business expenses, but a minimum funding target must be met. Defined benefit plans are no longer popular with large organizations, Tom Jordan notes, but they’re a good option for “late starter” entrepreneurs who may not have substantial savings. The reason? A defined benefit plan allows high-earning entrepreneurs over the age of 50 to invest large sums of cash in their pension until retirement age. Costs of funding are offset against your business, but contributions must be made every year.
Suitable for: Entrepreneurs over 50 years old.

Cash Balance Plans
Sometimes referred to as hybrid retirement plans (merging some features of a defined contribution—401(k)—plan with a defined benefit plan) cash balance plans differ from traditional pensions in that the benefit is a specific account balance at retirement, rather than a series of payments. These are sometimes called “hypothetical accounts” because they ignore gains or losses in the investment. Additionally, the investment risk is borne by the employer, so “increases and decreases in the value of the plan’s investments do not directly affect the benefit amounts promised to participants.” The cash balance market has enjoyed consistent growth for a number of years. Around half of all cash balance retirement plans are held by companies with 10 or fewer employees and 80 percent are in businesses with under 100 employees. Cash balance plans provide an avenue for you and your highly compensated workers to save more tax-free dollars for retirement. However, these plans are subject to contribution testing.
Suitable for: Businesses with less than 100 employees.

Despite their importance to employees, half of all American workers lack a company-sponsored retirement plan. Offering one can give your business an edge in a competitive talent pool, and knowing which one suits you and your employees best can better position you now and in the future.

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