Why offer an employer-sponsored retirement plan?

You want to compete for top talent

It’s tough to be competitive without offering retirement benefits. The US Bureau of Labor Statistics reports that 71% of American civilian workers had access to retirement benefits, and Glassdoor found that they represent three of the top five benefits that predict employee satisfaction.

Meanwhile, Spark 401k’s 2017 Small Business Retirement Planning Index found that 94% of small business owners who offer a 401(k) said it helps them drive recruitment and retention, 52% said it helps them attract higher-quality employees, and 47% said it inspires increased employee engagement.

And on the flip side: Nearly half of those business owners said that departing employees told them a lack of retirement benefits influenced their decision to leave. (Those owners also said it costs 26% of those employees’ salaries to replace them. And the Center for American Progress reports that for highly educated, executive-level positions, this number could be over 200%.)

There are business tax benefits

Employer contributions to team members’ retirement accounts may be tax deductible as business expenses. And if you have fewer than 100 employees, you might be able to take advantage of the Retirement Plans Startup Cost Tax Credit, too. That one lets you deduct half of your plan’s “ordinary and necessary” start-up costs, up to $500 a year. (You might also be able to deduct your plan’s start-up costs as business expenses … but you can’t double-dip: You either deduct the costs or apply for the credit).

You can participate

According to that Spark survey, almost half of small business owners are saving less than 10% of their own income for retirement — with half of that half saving nothing at all. Instead, more than a third said they’ll sell their business to fund their retirement, which is … less than ideal (all the eggs, meet one basket). But when a company offers a retirement plan, owners are eligible to use it, too.

Outsourcing’s pretty easy these days

Want help with plan administration? You’ve got tons of options — and automation and technology are bringing the price down, too. Basic services can cost small businesses as little as $1,000 a year. (And that’s before the tax credit mentioned above.) The cost often depends on how many employees you have and which services you want — from plan design and set-up to employee enrollment, record-keeping, compliance, and investment management.

Retirement plan options for small businesses

Some owners think they’re just too small to offer a retirement plan. That’s not really true anymore. Whether you can afford to contribute on behalf of your employees is another question. If you can’t, don’t let it stop you — employer contribution matches are becoming more and more common, but you can find plans where they aren’t required.

Here’s a look at the most common plans. Your company’s tax pro can help you decide which one’s the best fit for your needs.

IRA options

You’ll want to look at three main types of Individual Retirement Accounts (IRAs): a payroll deduction IRA, a SEP IRA, and a SIMPLE IRA.

Payroll deduction IRA

A payroll deduction IRA is just another name for a garden-variety personal IRA, be it traditional or Roth. As the employer, you come into the picture by giving your people the option to contribute through — you guessed it — a payroll deduction.

This could be a good option if you’re looking for a very simple, hands-off retirement plan. The potential downside for your employees is that personal IRAs have a low annual contribution limit ($7,000 or $8,000 for those over 50).

SEP IRA

A SEP IRA could be a good fit if you have either no employees or only a few (although technically there’s no limit). With a SEP IRA, all contributions come from the company. The good news: There are no annual funding requirements, so if your company’s income is unpredictable or fluctuates a lot, you can switch up how much you contribute.

The other good news: The contribution limits are pretty high — higher even than a 401(k). You can put in up to 25% of an employee’s income, but not more than $69,000 for 2024. (That goes for you, too.) Also, you might be able to contribute to a personal IRA even if you have a SEP IRA.

The bad news (depending on how you look at it): The company has to contribute the same percentage to every employee’s SEP IRA. That means if you want to contribute 25% of your own income for retirement, you have to contribute 25% of each of your employees’ income, too. If you have a lot of team members, that could get expensive.

SIMPLE IRA

If you have fewer than 100 employees, there’s also the Savings Incentive Match Plan for Employees (SIMPLE) IRA. With this plan, most contributions come from the employee, but you have to put money in, too — either a dollar-for-dollar contribution match on the first 3%, or a set contribution of 2% for every employee (whether the employee contributes or not).

The individual contribution limit is $16,000 for 2024 (plus $3,500 if you’re over 50 if the plan allows it), but if the employee makes other “elective deferrals,” this goes toward their limit of $23,000. A SIMPLE IRA could be an especially good fit if you have employees who don’t work very often, because those who make less than $5,000 a year can be made ineligible (so you don’t have to contribute for them).

401(k) options

The more employees you have and the more highly paid they are (meaning they’re more likely to max out a personal IRA), the more likely it is that a 401(k) makes sense for your company. There are several steps involved in establishing a 401(k), but your plan administrator can help with most (or all) of them.

You also have three main types of 401(k)s to choose from: A traditional 401(k), a safe harbor 401(k), and a SIMPLE 401(k).

“Traditional” 401(k)

The first option is a traditional 401(k). When people talk about retirement accounts, “traditional” usually refers to the ability to contribute to your plan pre-tax — as opposed to a Roth 401(k), where your contributions are taxed but your withdrawals upon retirement aren’t. But for small business plans, all that goes out the window. In this context, “traditional” means “as opposed to a safe harbor or SIMPLE 401(k).” So a Roth 401(k) that isn’t structured as a safe harbor or SIMPLE plan falls into the “traditional” category, too.

Employer contributions are optional, but that flexibility comes with a tradeoff: In order to “verify that deferred wages and employer matching contributions do not discriminate in favor of highly compensated employees,” the IRS requires extensive annual paperwork. If you fail one of their non-discrimination tests, you could have to make expensive and time-consuming corrections. The good news for your team: Employees can contribute up to $23,000 for 2024 (plus $7,500 if they’re over 50).

Safe harbor 401(k)

To avoid having to go through those non-discrimination tests, you could instead opt for a safe harbor 401(k). These are very similar to traditional 401(k)s, except you’re required to make contributions (either as a match or a set contribution for everyone), and those contributions must be fully vested right away.

SIMPLE 401(k)

Finally, a SIMPLE 401(k) is pretty much identical to a SIMPLE IRA — including the maximum number of employees you can have (100), the employer contribution requirements (3% match or 2% to all), and the individual contribution limit ($16,000, plus an additional $3,500 for those over 50) — except it’s a 401(k). This makes it the most restrictive type of 401(k) when it comes to contribution limits. But the good news is that this option also exempts you from that extensive non-discrimination testing.