The right retirement benefit can help employers attract and retain talented employees and demonstrate their commitment to employees' long-term financial goals. While small employers may have concerns about the cost and complexity of administering a retirement plan, there are a number of options that are easy to establish and may be more affordable than you think.
#1: SIMPLE IRA
The Savings Incentive Match Plan for Employees (SIMPLE) is a tax-favored retirement plan that allows both employees and employers to contribute to traditional IRAs. Key elements include:
- Eligibility: In general, employers must have 100 or fewer employees and no other retirement plan to establish a SIMPLE IRA. Employers with such a plan must generally offer it to any employee earning $5,000 or more in compensation during any preceding two years. In addition, employees are fully vested in all contributions from day one of participation.
- Tax credits: Tax credits of $500 for the first three years of the SIMPLE IRA plan may be available to employers to offset the costs of establishing and administering the plan.
- Filing and testing: There is no tax or other government filing required for the Plan and non-discrimination testing is not required.
- Contributions: Employers must make a matching contribution to participating employees (between one and three percent depending on the circumstances) or contribute two percent of each employee's compensation.
- Tax deductions: Employer contributions are generally tax deductible to the employer.
#2: 401(k) Plan
A 401(k) plan allows both employers and employees to make contributions toward retirement savings. Key elements include:
- Contributions: Unlike a SIMPLE IRA, there is no employer contribution requirement. In a traditional 401(k), an employee's contributions are generally made on a pre-tax basis, and taxes on contributions and earnings are deferred until they are distributed, usually at retirement. Compared with IRA-based plans, the 401(k) plan is attractive to employees because the maximum contributions are generally higher than the SIMPLE IRA.
- Roth option: There is also a Roth 401(k) option in which an employee contributes on a post-tax basis, and distributions (including earnings) may be made tax-free after meeting certain conditions.
- Administrative costs: 401(k) plans may have higher administrative costs than IRA-based plans because 401(k) plans are more complicated than SIMPLE IRAs to maintain.
- Non-discrimination testing: 401(k) plans require non-discrimination testing (which is intended to ensure the contributions or benefits provided under the plan do not discriminate in favor of highly compensated employees/owners). Highly compensated employees/owners seeking to maximize their personal contributions without nondiscrimination testing can establish a Safe Harbor 401(k).
#3: Profit Sharing
A profit-sharing plan can be an attractive retirement savings plan option for employers that have concerns about cash flow. With this type of plan, the employer can decide from year to year whether (and how much) to contribute to the plan based on what they can afford in that particular year. However, these plans tend to have higher administrative costs and more requirements than SIMPLE IRA plans or SEP Plans (see below). For example, employers with profit-sharing plans must file Form 5500 annually with the federal government and provide a summary to participants of their account activity each year.
#4: SEP Plan
A Simplified Employee Pension (SEP) plan is a retirement plan where an IRA is established for each employee, which is funded solely through company contributions. Key elements include:
- Eligibility: An employer of any size may establish a SEP Plan, although these plans are more common when there are few or no employees other than owners.
- Contributions: A business establishing a SEP Plan may decide whether, and how much, to contribute each calendar year up to a certain amount set by the IRS.
- Tax credits: Qualified employers may also be eligible for a tax credit ($500 per year for the first three years of the plan) for establishing a SEP Plan and employer contributions are tax deductible on the employer's tax return.
#5: Payroll Deduction IRA
A payroll deduction IRA (Individual Retirement Account) allows employees to save for retirement without an employer-sponsored retirement plan. The employee establishes the IRA with a financial institution and then authorizes the employer to make payroll deductions from the employee's salary and contribute them to the IRA. This may not be as beneficial to employees as the employer cannot negotiate with the financial institution to obtain cost effective, or other special terms, for employees or help select investments for the IRA.
This type of plan was started by the federal government in 2014 and is a Roth IRA that invests in a U.S. Treasury retirement savings bond. Key elements include:
- Contributions: With a Roth IRA, an employee contributes on a post-tax basis, but earnings and distributions are generally tax-free. Employees may contribute to their myRA account through payroll deductions, a checking or savings account, or income tax refunds.
- Cost: As with payroll deduction IRAs, employers don't administer employee myRA accounts or make contributions. Therefore, there is no cost to the employer other than the time it takes to share information about myRA with employees and set up payroll deductions (if applicable).
Providing retirement benefits can help improve recruitment, retention, and employee morale. Carefully evaluate the options that are available to your business and consider those that work best for your company and your employees' needs.