Choosing the Best Retirement Plan for Your Employees
Review the Options to Determine the Best Employer-Sponsored Plan for Your Company
As a small business owner, you understand all the complexities that come with being responsible for not only yourself, your company, and your family – but for your employees, as well. While it’s easy to get bogged down in the day-to-day details of running your business, periodically taking stock of your company’s overall financial health is a great way to ensure that your business is in a position to thrive now – and for years to come. Consider the options, pros, and cons when trying to choose the best retirement plan for your employees.
Each day, you make decisions that affect your business. How can you be sure that you’re keeping the big picture in mind and that each decision you make is a sound choice for your bottom line and long-term business goals? Below we’ll share a simple but effective financial health checklist for your small business.
The 401(k) Plan
Let’s start with the most widely recognized retirement plan. As you may know, 401(k) plans are available to most types of private organizations. This includes partnerships, S corps, and sole proprietorships. The main benefit is that they are incredibly flexible when it comes to plan design and available features. Employees can contribute up to $19,500 in 2021, plus an additional $6,500 if they are over age 50, and loans and hardship withdrawals are permitted.
As an employer, you can choose to match a portion of your employees’ contributions, which is an incredibly attractive feature for both recruitment and employee retention. If you choose to do so, you’ll be eligible for a substantial tax deduction. There are also significant tax credits and the ability for you, as a business owner, to reduce your personal taxable income, too.
Of course, there are limitations to 401(k) plans, too. They must follow a vast array of IRS requirements and be tested for compliance, which can be stressful and also expensive. They also require filing an annual Form 5500, which can be challenging to prepare. However, utilizing a financial advisor can help limit your time investment.
The 403(b) Plan
These plans are similar to 401(k)s in many ways, but they are specifically for nonprofit organizations and particular types of public entities. A major benefit is that all employees are immediately eligible to participate in the plan, and employers can choose to match contributions, too.
It should be noted that, while 403(b) plans share many of the same benefits as 401(k) plans, they also share requirements for rigorous testing for IRS compliance and the costly and time-consuming Form 5500.
The SIMPLE IRA
SIMPLE is an acronym that stands for Savings Incentive Match Plan for Employees. This type of retirement plan is only available to businesses with less than 100 employees who earn $5,000 or more per year. If your company qualifies, a main benefit of the SIMPLE IRA is that it’s easy to create and maintain, relative to the plans mentioned above. It also tends to be a less expensive type of employer-sponsored plan.
One drawback of note is that, as an employer, you must contribute to your employees’ retirement accounts. So, depending on your company’s financial health, this may or may not be an option for you. On the employee side, one limitation of the SIMPLE IRA is that there will be a significant tax penalty on any withdrawals taken within the first two years. For employees over age 59 1/2, it’s a 25% tax penalty. For younger employees, it’s a 35% penalty.
A Simplified Employee Pension (SEP) provides a business owner with an easy way to contribute toward their employees’ retirement plans. They are available to any employer, fairly inexpensive to create, and you can offer your employees a retirement benefit up to 25% of their compensation plan (subject to some limitations).
For employees, having a SEP IRA means any contributions are immediately vested at 100% – regardless of how long they work for your company.
This type of account does have one major limitation, which is that employees can’t contribute to their own savings – only the employer can. Since the employer contributions are mandatory, this can be a cost-prohibitive retirement plan for some business owners.
Individual Retirement Accounts are not traditionally offered as part of an employee benefit plan. That’s because they are sold directly to investors instead. However, they do offer another option for employees who want to use them in tandem with whatever retirement plan option you might offer through your company. Account-holders can only put away about one-third of what they can with a 401(k), however.
Choosing the Best Retirement Plan for Your Employees
Since there are multiple options available to you, choosing a retirement plan option for your employees really comes down to what’s best for your particular company. Consider factors like the size of your business, how many employees you have, and your annual revenue. Oftentimes, you can come to a decision by thinking about the structural makeup of your company alongside your motivating factors for implementing your retirement plan.
At Paces Ferry, we offer retirement plan consulting services. Our holistic approach means we provide plan sponsors a comprehensive understanding of all facets of their plan options, including any regulatory effects. If you need a partner to help with selecting a plan, or with plan governance and design, please reach out to us today.
Paces Ferry Wealth Advisors, LLC is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”). This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.
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