Small business owners have various options for retirement savings. Those options can sometimes be challenging to navigate or leave you with unanswered questions.
- When is the right time to start a 401(k) plan?
- Should you stick to SEP IRAs?
- Is your business ready for a more structured and sophisticated retirement plan?
Here is how to tell which option is right for your small business.
Retirement Plans For Small Businesses
Everyone needs to save for retirement, including small business owners and their employees.
However, many small businesses struggle the first few years to find strategic ways to save for the future. So, many don’t often start offering retirement plans right away, especially more complex plans that are perceived to be complicated or expensive to create and maintain.
What are your options from the get-go?
Instead, many small business owners start by offering SEP-IRAs, or simplified employee pensions. SEP-IRAs are so popular because they are relatively simple to provide and require little from the business owner in terms of operating cost.
A SEP-IRA allows the employer to contribute up to 25% of each employee’s salary but does not require that the employer contribute in any given year. That rule provides a small business owner some flexibility. However, the employees themselves cannot contribute, putting all of the responsibility on the employer.
A self-employed business owner can use a SEP-IRA for themselves but may instead opt for a Solo 401(k). Even though it is a 401(k), the “solo” part means that many of the regulatory requirements of typical 401(k) plans don’t apply. Why? There aren’t employees to worry about, so these plans are still accessible to implement.
A significant difference between the two plans is that a SEP only allows for up to a 25% contribution from the company, while a solo 401(k) allows for employee and employer contributions up to the same limits (which we’ll discuss below) as a regular 401(k)s.
Finally, business owners can consider SIMPLE IRAs. SIMPLE IRAs are much less flexible. These plans require that the employer contribute in one of two ways:
- Match employee contributions up to 3% of their salary
- Contribute 2% of each employee’s salary whether the employee contributes or not.
Contributions to a SIMPLE IRA cannot exceed $13,500 per year, plus a $3,000 catch-up contribution if the participant is 50 or over. They are often best suited as a starter plan for small businesses that have few employees.
Is Your Business Ready For A 401(k) Plan?
While SEPs, SIMPLE IRAs, and solo 401ks are a solid place to start, eventually, your company may outgrow them.
Signs you should start a 401k for your employees may include:
- You want more choices and flexibility. Within limits, you can decide how much the business contributes to each employee’s account.
- You want to help your employees and get tax credits and deductions for the business. Administrative fees may be deductible business expenses, and you can avoid federal, state, and payroll taxes on contributions to your employees’ accounts.
- You and your employees need to save more. 401(k) plans have higher contribution limits than both SIMPLE and SEP plans. In 2021, employees can contribute up to $19,500, plus an additional $6,500 if they are 50 or over. Combined with all other contributions the employer might make, the total annual limit on additions to a participant’s account is $58,000 (plus the catch-up if applicable).
- You want the ability to make additional contributions. 401(k) plans can be set up to allow for profit-sharing contributions. These can be a significant boost to savings and may even motivate employees to do their best because they participate in the company’s success.
A less numerical, but not less relevant, reason to offer a 401(k) is to attract and retain the best talent for your small business. Especially in today’s competitive labor market, top employees can be hard to get (and keep). Offering a 401(k) with a solid matching contribution is quickly becoming a “must-have” for companies, even small ones.
How To Implement A New 401(k) Plan
If you find yourself nodding along with the features outlined above, then it may be time to start a 401(k) plan for your small business. But how can you accomplish that goal? While we at Blue Rock are ready to help you get started, here are the steps you’ll need to take.
Start by researching providers and plans. Many firms offer 401k plans on their platform. Consider the types of investments you want to make available in the plan and look for providers that supply those.
The next step will be to draft your plan documents. If you aren’t familiar with this process, get a professional to help you. Your plan has to comply with specific IRS requirements that deal with how the program provides benefits (to ensure it’s fair, get a professional to help you.
You’ll then establish the plan’s logistics to include setting up a trust to hold the plan’s assets and implement a system for maintaining the appropriate records to have an accounting of employee and employer contributions.
Lastly, announce the plan to your employees! You’ll need to provide them with a document outlining the plan rules and policies, called a summary plan description.
If you are wondering if starting a 401(k) for your small business is right for you, we can help you decide. When you are ready to implement your plan, we can walk you through setup from start to finish making it a smooth and easy process.