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Small Business Retirement Plans – The Ultimate Guide

There are several different types of small business retirement plans that company owners can choose from. Each have their pros and cons, including costs, contribution limits and unique tax advantages. However, offering retirement benefits can also be a great way to attract and keep talent, so we advise you to keep reading on. Let’s now look at the summary of the products out there for small business owners to offer as retirement plans.

Summary Table of Small Business Retirement Plans

	401(k)	SIMPLE IRA	SEP IRA	Traditional or Roth IRA
Administrative Costs per Employee (Per Year)	$60 Human Interest	$25 Vanguard	$20 Vanguard	$20 Vanguard
Who Contributes?	Employee & employer funded	Employee & employer funded	Employer funded only	Employee funded only
Contribution Limits (2017)	$18,000 (employee) $54,000 (employee + employer)	$12,500 (employee) 3% of salary (employer)	25% of salary (up to $54,000)	$5,500
Filing Requirements	Form 5500 Annual testing with IRS	None	None	None

If a 401(k) turns out to be the right option for you, check out Human Interest. With built-in investment advising and friendly customer support, your employees will be able to understand and use the 401(k) confidently, with great low-fee options for their investments. For employers, they offer a dedicated account manager for HR, payroll, and compliance support so that you don’t have to be a 401(k) expert or hire any additional staff to set up and run the 401(k). Click here to get more information.

Pros & Cons to Offering Retirement Benefits

Offering retirement benefits can really benefit your small business (pun intended). Let’s look at the top 5 pro’s to offering retirement benefits:

Benefit 1: Tax breaks

As a small business owner, you are eligible for up to a $500 tax credit the first year after you start your 401K plans for your employees (IRAs aren’t eligible for this credit). If you match employee contributions, those contributions are tax deductible though for any retirement plan, resulting in further tax savings.

Benefit 2: Employees can take it with them

Employees can take their retirement money with them when they leave your firm. Your employees will handle this with your provider directly.

Benefit 3: Useful & important to employees (and potential new hires)

Offering retirement plans is a huge recruiting draw to attract and keep employees. With the talent pool as competitive as ever, offering retirement plans is a way to stand out among employers and create a positive employer brand. This can potentially save you dollars on recruitment costs with lower employee turnover. Offering benefits, such as retirement plans, is actually good for your bottom line.

Benefit 4: Simple to setup & maintain

Retirement plans, in general, are easy to set up and maintain from an administrative standpoint, and won’t cost you as the business owner a lot of hours working on maintaining them. This is especially true now with newer providers on the market, like Ubiquity, where everything is automated for you, including compliance measures.

Benefit 5: Save for your own retirement

You as the business owner can also generally participate in all retirement plans offered, which is a nice perk to help you save for your own retirement, and saves you money on your personal taxes. Let’s also look at the other side of the coin- what are the drawbacks to offering retirement benefits?

Drawbacks to Offering Retirement Benefits

Though offering a retirement plan can have several benefits for a small business owner, it also does have a few drawbacks.

Drawback 1: Administrative fees

Per Sharebuilder 401k, the average administrative cost is around $60-100/employee for a 401K. However, SIMPLE IRAs will cost more like $20-25/employee per year, which makes it a better budget option. As you add more people, those costs then rise since they are per employee. There might also be a one-time setup fee.

Drawback 2: Will your employees care?

Especially if you have a young employee base, or one that lives on a tight budget, they might not be able to understand or recognize the benefit of a retirement plan. Especially if you choose automatic enrollment, make sure that you do your best to communicate the benefits, especially come tax time (i.e. an increased refund for them).

Drawback 3: Employer contributions

Many small business owners get nervous about also having the budget to match employee contributions. Remember, you don’t have to match employee contributions at all, or some plans will let you match a different amount, like 100% match up to a specific percentage or a 50% match. Now, let’s go into how you would actually provide retirement benefits to your employees.

How to Provide Retirement Benefits

Now that you are ready to provide a retirement plan for your employees, let’s look at the 6 steps you’ll need to take to get things rolling:

1. Gauge interest from employees from a survey

We highly recommend trying an employee engagement survey where you ask a question directly about retirement benefits. If there’s little interest, you might want to consider having a meeting with them to explain why you are considering starting one, and answer their concerns.

2. Choose the type of retirement plan

Look at our summary table of retirement plan options from above.

3. Choose a provider

There are many small business dedicated retirement professionals out there. Ubiquity is one that specializes in affordable 401k plans. Vanguard is the best and most affordable options for a SIMPLE IRA.

4. Decide if you will match or not (and how much)

As you pick a provider, make sure they can lay out for you what your budget needs to be for contributions, matching, and administrative fees. Go over various options on how to match, and then make a decision. A typical match for a small business owner ranges from no match to a flat fee of $500/year to a 1:1 match.

5. Decide on eligibility rules

Some employers use retirement plans as a way to keep employees, and many make it only available for after 6 months or 1 year with a company. It all depends on the plan you offer though, which we detail more in our overview of the 5 kinds of retirement plans below.

6. Tell employees

You now need to tell your employees when the retirement plan will start, and get their signatures on various documents for compliance purposes. SHRM recommends automatically enrolling employees who qualify unless they consciously opt out. Not only does it increase participation in the plan, it also lets you plan a bit more as a business owner on contribution amounts and tax savings (versus waiting on your employees to decide).

7. Set up your retirement plan and get started.

If you still want more details, we have a great article on how to set up a 401K and how to set up a SIMPLE IRA. Now, let’s look at the 5 plans from our table in more detail.

The 5 Kinds of Retirement Plans in Detail

There are 5 main kinds of retirement plans available on the market today. Those 5 plans are:

• Traditional 401K
• SIMPLE IRA
• SEP IRA
• Safe Harbor, SIMPLE, or Individual 401K
• Individual Retirement Plans (Traditional or Roth IRA)

1. Traditional 401(k) – A More Flexible Option

401(k)s are similar to a SIMPLE IRA in that both employees and employers can contribute pre-tax dollars. The main difference is that the employee contribution limit is much higher ($18,000 for 2017) and employers have a lot more freedom as to how they contribute funds. Whereas a SIMPLE IRA gives employers only 2 options (flat 2% of pay, or dollar-to-dollar match up to 3% of pay), 401(k)s can basically be set up however you like. With this freedom comes more administrative hassle, however. The IRS requires annual testing to ensure your plan is fair to employees. Likewise, 401(k)s have considerably higher start-up and administration fees.

Who contributes:

Employer and employees.

Limits:

Employees contribute up to $18,000 per year into a 401(k) (for 2017.) An additional $6,000 if allowed for employees aged 50 or over. Employers can contribute an additional amount depending on how much the employee puts in: Combined, employees and employers cannot exceed $54,000 (in 2017). So if an employee contributes all $18,000, their employer can add up to $36,000.

Filing Requirements:

Form 5500 must be filed annually with the IRS

Advantages:

Traditional 401(k) plans give employers the most flexibility: You can choose to make a fixed contribution for all employees, to make a dollar-for-dollar match for employees who contribute or to match a percentage of employee contributions. Likewise, you can set conditions for who gets employer-matching. For example, you might require employees to be at your business for at least a year before they qualify.

Disadvantages:

The downside to traditional 401(k) plans is that they have to be examined every year by the IRS. The ADP and ACP nondiscrimination tests are administered to ensure that your policy doesn’t disproportionately benefit higher-earning employees. This means a few extra hours of clerical work to put together the data needed for testing. Also, if your plan fails the test, it could mean costly mandatory contributions to “even” things out. Thankfully, using a service such as Human Interest means that they will keep you compliant.

Cost:

The cost of a Traditional 401(k) plan tends to be much higher for small businesses than larger businesses (relatively-speaking). A company with 10 employees should expect to pay around $2,000 a year to their provider, according to Human Interest. Additionally, employees will pay an expense ratio (a small fee that goes to the mutual fund) that’s anywhere from 0.15% to 1% of their funds.

Who Can Provide One:

A Professional Employer Organization (PEO), like Justworks, HR benefits software, like Gusto, or an independent retirement focused provider, like Human Interest, can all provide your business with one. Visit Human Interest

2. SIMPLE IRA – Best General Small Business Retirement Plan

A SIMPLE IRA is a great option for small businesses (under 100 employees). It allows both employees and employers to make pre-tax (or tax deductible) contributions. It’s also one of the easiest retirement plans to set up, as it has no IRS filing requirements and minimal service fees.

Who contributes:

Both the employer and employee. Contributions are mandatory for employer, but elective for employee.

Contribution Limits:

Employees can contribute up to $12,500 in 2017. All employees aged 50 or over are allowed to contribute an additional $3,000, bringing their total to $15,500. Employers can contribute up to 3% of an employee’s salary (including bonuses, commission and all other compensation.)

Matching Requirements:

Employers are given two contribution options:

1. Match employee contributions on a dollar-for-dollar basis up to 3% of their annual pay. If an employee does not contribute, there is no matching requirement.
2. Contribute to all employee accounts (whether or not they choose to contribute) an amount of 2% of their annual pay.

Filing Requirements:

No annual filing requirement with IRS

Advantages:

SIMPLE IRAs are the easiest way to offer your employees a “real” retirement plan – one where employees contribute money and you match their contributions. Unlike 401(k)s, there’s no filing or testing requirements by the IRS, which makes SIMPLE IRAs a lot easier to setup and manage.

Disadvantages:

The main downsides to a SIMPLE IRA is that employers can’t contribute all that much (up to 3% of an employee’s salary – so $1,500 for an employee that earns $50,000 a year). Also, you have to offer the plan to all employees who earn over $5,000/year, regardless of their length of time at your business or their part-time vs. full-time status.

Cost:

Through Vanguard, there’s a cost of $25/year per account. So if you have 10 employees, the cost would be $250 per year. Additionally, you may need to purchase software to manage withholdings and deposits. Payroll software like Gusto, however, comes with this functionality built-in. The other cost to consider is the fund expense ratio. This is a small fee the mutual fund takes from your employee’s investments. Expect this to be anywhere from 0.15 to 1% of the investment, and be wary of anybody who charges over 1%.

Who Can Provide One:

A key perk to the SIMPLE IRA is that you, the business owner, can be the administrator. Simply sign up for Vanguard to create your employee’s accounts, talk with your employees to determine their deposit amounts, choose how much you’ll match, and then link your payroll service like Gusto to your accounts provider. You could also use a private broker to help you do this.

3. SEP IRA – For The Self-Employed

If you’re self employed and want to start a retirement account for yourself (and a spouse), SEP IRAs are one of the easiest and most flexible options. SEP IRAs let you contribute up to 25% of your annual compensation (or $53,000, whichever is lower) to your retirement fund. Unlike a SIMPLE IRA, there’s no minimum contribution requirement. You can change it from year to year, and even take a year off. Although SEP IRAs can technically be used at a small business with employees, they’re not a particularly strong option. This is because SEP IRAs are employer-funded ONLY: There’s no way for employees to contribute to their own retirement funds. On the other hand, this is what makes SEP IRAs a good option for self employed.

Who contributes:

Employer only

Limits:

Employers can contribute up to 25% of their total annual compensation (or $53,000, whichever is lower). For a self-employed person, the contribution limit is actually lower – around 18% of your net profits. This is because you need to factor in the contribution itself as an expense. To view the full formula, check out this explanation on The Motely Fool here.

Matching Requirements:

SEP IRAs are one of the more flexible plans in terms of employer contributions. You can choose to contribute whatever percentage of salary/profits you like (below 25%). This percentage can change from year to year, depending on your profitability. If you do have other employees at your business, however, bear in mind that all eligible employees must receive the same percentage.

Reporting Requirements:

No annual filing requirements with the IRS.

Advantages:

The key advantage to a SEP IRA is that you can contribute whatever amount you feel comfortable with from year to year. Unlike a SIMPLE IRA, you’re not locked into a given percentage. Likewise, the higher limits of a SEP IRA makes it an attractive choice for higher-paid self-employed.

Disadvantages:

SEP IRAs don’t work well for small businesses with employees. The reason is that employees cannot contribute to their own account. Employees can typically open a separate Traditional or Roth IRA account if they wish to save more, but this will incur an extra cost to them.

Cost:

Through Vanguard, the cost is $20/year for each account with less than $10,000. So if you’re just starting out and have 10 employees to cover (including yourself), the cost would be $200 per year. The expense ratio (percentage mutual fund takes from your employee’s investments) can be anywhere from 0.15% to 1%.

Who Can Provide One:

An independent retirement broker or an online fund like Vanguard can provide an SEP.

4. Safe Harbor, SIMPLE or Individual 401(k)

While traditional 401(k)s are typically seen at larger businesses, there are some off-shoots that are far more suitable for small businesses. Consider one of these plans if you want the flexibility and higher contribution limit of a 401(k) without the high administrative cost and hassle:

Who contributes:

Employer and employees.

Limits:

Same as Traditional 401(k), except for SIMPLE 401(k). (explained below)

Filing Requirements:

Form 5500 must be filed annually with the IRS Safe Harbor – A safe harbor plan is similar to a traditional 401(k), but with the benefit of not having to undergo nondiscrimination testing. Safe harbor plans are less flexible: Employers are required to contribute to all eligible employees, either a fixed percentage of payroll, or matched deferrals up to a certain amount. This helps ensure that contributions are spread more evenly. Learn more about Safe Harbor plans and calculate how much matching or non-elective contributions may add to your payroll with this handy Safe Harbor 401(k) calculator. Automatic Enrollment – An automatic enrollment 401(k) is a type of safe harbor plan. The employer contributes a fixed percentage or amount to all employees enrolled unless they opt out. Again, this type of plan helps to pass or avoid non-discrimination testing. Also, since all employees are automatically enrolled, this often increases amount of participants in the plan. Individual 401(k) – This type of plan is available to sole proprietors or partners who have no employees. It enables business owners to save for retirement with the flexibility, perks, and higher contribution limits of a 401(k) (up to $53,000 per year). It’s very similar to a SEP IRA, but with a few key distinctions: Individual 401(k)s allow business owners to take out loans against their savings. Also, individual 401(k)s require more setup time and annual reporting than SEP IRAs. SIMPLE 401(k) plan – Similar to a SIMPLE IRA, this plan is available to small businesses with 100 or fewer employees. Contribution limits are actually the same as SIMPLE IRAs ($12,500), and employers have the same matching requirements. There’s only a few key differences between SIMPLE 401(k)s and SIMPLE IRAs:

• SIMPLE 401(k)s allow employees to take out loans against their savings. IRAs do not.
• Employees must be 21+ to participate in a SIMPLE 401(k) plan. IRAs have no age requirement.
• SIMPLE 401(k)s require a Form 5500 be filed annually with the IRS. IRA plans do not.

Who Can Provide One:

A Professional Employer Organization (PEO), like Justworks, HR benefits software, like Gusto, or an independent retirement focused provider, like Ubiquity, can all provide your business with one.

5. Individual Retirement Plans (Traditional IRA and Roth IRA)

These are not group retirement plans, but rather an option for employees and self employed who want to set up a retirement account on their own. One key advantage to an IRA is that it’s portable – if you leave your job, you can continue contributing to the same retirement account. Likewise, if you’re self employed and have multiple ventures, you can contribute pay from all of them. There’s two different types of IRAs: Traditional and Roth. The key difference is how they manage taxes. You can contribute to a Traditional IRA tax-free, whereas a Roth IRA is taxed. When you withdraw funds in retirement, however, a Roth IRA, it is tax-free, whereas a Traditional IRA is subject to income tax.

Who contributes:

Employees only.

Limits:

The maximum amount for Traditional IRA is $5,500 for 2017. Employees who are 50+ can contribute an additional $1,000, for an overall limit of $6,500. Roth IRA limits are typically the same, but with potential limitations depending on your income level. (See here) Traditional vs. Roth – Which is Better? Both also have unique savings advantages: A Traditional IRA helps you save more now by making pre-tax contributions. A Roth IRA helps you save more later, by allowing tax-free withdrawals. Most individuals prefer the former choice, as one’s tax bracket is typically lower during retirement. Therefore you can save money by paying taxes later, when your tax rate is lower. If you anticipate your tax bracket may be higher during retirement, however, a Roth IRA would be a wiser choice.

Matching Requirements:

N/A. IRAs are funded exclusively by employees, so there’s no matching from employers.

Reporting Requirements:

No filing requirements with the IRS.

Advantages:

Easiest of all retirement programs to set up – there’s essentially no administrative cost. Portability can also be a major advantage.

Disadvantages:

Contribution limits are very low compared to other small business retirement plan options. Employers cannot make contributions at all. Also, if you’re a business owner, remember that this is not an employer benefit plan. IRAs have to be setup by employees. You may still be expected to assist them, however, by withholding pre-tax payments and sending them to the mutual fund.

Cost:

Traditional/Roth IRAs are the least expensive retirement funds to setup and manage. Vanguardcharges employees just $20/year until they have over $10,000 in their account. There’s also an expense ratio (percentage mutual fund takes from your investment) that can be anywhere from 0.15% to 1%, depending on the funds you select. Employers pay nothing for individual IRAs, unless you want to use software to manage withholdings. Payroll software like Gusto comes with this functionality built-in.

Who Can Provide One:

An independent retirement focused provider, like Vanguard, can provide your business with one.

The Bottom Line

If you want to set up a small business retirement plan that allows you and your employees to contribute pre-tax dollars, a SIMPLE IRA is the best way to go. It’s easy and inexpensive to set up, and gives you the flexibility to match employees, or pay them a fixed percentage. At some point, you may want to switch to a 401(k) so you can contribute a higher percentage (above 3%), or so you can set more rules on contribution matching. The good news is that SIMPLE IRA funds can be moved to a 401(k) with no fees or tax penalties, as long as it passes a 2-year waiting period. Thanks to Mark Zoril of PlanVision for providing valuable information to this article.

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