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According to the AARP, nearly half of all working Americans have no access to a retirement savings plan through their employers. (That’s about 32 million people.) Additionally, small businesses with 100 or fewer employees are much less likely to offer retirement plans than are larger businesses. Meanwhile, a 2017 Pew Trusts Report has found that small business owners are more concerned than ever about retirement for both themselves and their employees.
The AARP has also reported that American workers find it difficult to regularly save for retirement without access to a savings plan through work. In fact, workers are 15 times more likely to save for retirement when a payroll deduction plan is made available to them.
Why Should Employers Offer Retirement Plans?
The studies mentioned above seem to lead toward one basic conclusion: small business owners should help their employees save for retirement by offering a more convenient way to save. But what are the practical reasons for doing so?
First, employers who offer retirement plans benefit from certain tax advantages. Making great retirement options available to employees also supports employee retention and satisfaction. Certain plans that include profit sharing can help employees feel vested in the best interest of your company.
Ultimately, employers should try to get as much feedback from employees as possible before implementing a new retirement savings option. What do your employees actually want? What would most benefit them and the company? It all depends on your unique circumstances.
Retirement Savings Options
So, you know you should offer retirement options to your employees, but where do you begin? Below are some (very basic) descriptions of the more common retirement plans offered by employers:
Simplified Employee Pension (SEP) Plans
- For businesses with any number of employees
- Contributions made by the employer only
- Contributions must be made at the same percentage for all employees
- Employees are always 100% vested in employer contributions
- Does not allow employees to defer income
Savings Incentive Match Plan for Employees (SIMPLE) IRA Plans
- For businesses with 100 or fewer employees
- Funded by employer and employee contributions
- Allows employees to defer income by making salary reduction contributions
- Usually requires a smaller contribution by the employer
- Employees are always 100% vested in employer contributions
Qualified Plans
- For larger businesses
- More complex, have stricter reporting requirements
- Several types of qualified plans. Most fall into two categories:
1. Defined Benefit Plans (Pension Plans)
• Promise to pay employees a steady flow of income in the future
• Employers must contribute a minimum each year (based on certain complex calculations)
• The complexity of these plans keeps smaller businesses from using them
• Defined benefit plans also typically offer the largest maximum allowable annual contributions of all the plans available. For instance, we have some small business clients who are able to contribute more than $200,000 annually to these plans per employee, while allowing them to defer those amounts from their current taxable income
2. Defined Contribution Plans
• Employers contribute to individual accounts for each employee
• Employees can invest money as they sit fit among investment options provided to them
• Do not require immediate vesting of amounts contributed
• Contribution percentage for each year cannot vary
401(k) Plans
- Can make elective deferrals up to a limit
- Employers can contribute a percentage of each employee’s compensation to the employee’s account
- Employers can match the amount of employees’ elective deferrals
- Total employer and employee contributions to a 401(k) plan are limited to the lesser of:
- 100% of the employee’s compensation, or
- $55,000 (for 2018)
401(k) plans can vary drastically based on a multitude of factors, so it’s wise to consult with your financial professional in order to determine what’s best for your company.
Do you need help selecting a retirement plan for your business?
Because implementing a new retirement plan can impact certain financial aspects of your business’ operations, you should consult with a financial advisor before setting anything in stone. Additionally, your advisor can take a look at your individual retirement goals and offer planning guidance.
At Pine & Company CPAs, our services extend beyond tax preparation and accounting. We provide insight for new business start-ups, financial planning and growth consulting for businesses, counsel on which accounting software to use (we’ll even train you or your internal accounting person if necessary), assistance with payroll, and business health analytics. If you have financial questions, we’re here with the answers.
