May is Small Business Month | Retirement Plan Options for Small Business Owners

As a small business owner, you know that your employees are the bread and butter of your company. Being able to offer them their own retirement plans will not only help increase retention rates but also attract top candidates to work for you. Research from Voya Financial shows that among working Americans, 60% are more likely to stay with their current employer if they offer an employer-sponsored retirement plan¹.

It may seem a little intimidating to figure out the right retirement plans to offer to your employees and which ones you can afford. This is why it is key to do research on different plans and choose the best one for your employees, your business, and you. Below is a list of plans and a short description on each one to get you started in your research:

Downloadable Quick Guide

SIMPLE- IRAs

This option is a cost-effective plan specifically designed for small businesses. SIMPLE stands for Savings Incentive Match PLan for Employees and is used for businesses who have fewer than 100 employees with no other retirement plans in place. This plan offers flexibility for employers where they can choose to offer matching contributions or nonelective contributions. Additionally, employees can choose to make salary reduction contributions to their own retirement account. Some small business owners opt for this plan because they find the cost to maintain it is lower compared to other plans.

Distributions from this plan are taxed as ordinary income. If earnings are withdrawn before age 59 ½ they may be subject to a 10% federal income tax. Typically, when you reach age 73, you must start to take the required minimum distributions.

SEP-IRAs

This option is similar to the SIMPLE – IRA in that it does not have the start-up fees and operating costs that a regular retirement plan has. In a SEP, otherwise known as a Simplified Employee Pension, the employer is the sole contributor and is required to contribute the same percentage to each eligible employee, however, the percentage contributed can change year to year. This is helpful for businesses that have changes in their cash flow. It’s important to note that with this plan, employees are not able to contribute themselves.

Like SIMPLE-IRAs, distributions from this plan are taxed as ordinary income. If earnings are withdrawn before age 59 ½ they may be subject to a 10% federal income tax. Typically, when you reach age 73, you must start to take the required minimum distributions.

Traditional 401(k)s

This option allows employers to match contributions from employees. This serves as an incentive for the employee to participate. The earnings that the employee chooses to place in their 401(k) are tax-deferred. This means that participants are not paying taxes on the amount until the money is withdrawn.

*This plan is subject to annual nondiscrimination tests to assess the Actual Deferral Percentage (ADP) and the Actual Contribution Percentage (ACP).  This means that average salary deferrals of highly compensated employees are compared to non-highly compensated employees to ensure that employer contributions are even and fair to all employees.

Roth 401(k)s

This option is often compared to a traditional 401(k) plan. The main difference is contributions by employees are post-tax dollars. This means that withdrawals made during retirement are tax-free.

The popularity in Roth IRAs is rising, among households with people ages 20-29, the percentage of people with a Roth IRA has almost tripled from 6.6% in 2019 to 19.2% in 2022². 

More Information on Roth IRAs

Safe Harbor 401(k)s 

This option is similar to the traditional 401(k) plan with a few important variations. Employer contributions must be fully vested when made and they can choose to offer matching contributions only to employees who defer, or they can be made on behalf of all eligible employees.  

Unlike the traditional plan, this option is not subject to the IRA’s annual nondiscrimination tests.

After choosing the plan that fits best for your employees and your business, it is important to make sure to find the right partners to help put your plan into place. This includes recordkeepers to keep track of plan details and activities, 401(k) advisors to help with legal responsibilities and heavy lifting, and third-party administrators to be there to outsource administrative work. 

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1. https://www.voya.com/news/2022/11/amid-war-talent-dont-forget-retirement-plan-voya-survey-finds
2. https://crr.bc.edu/roth-iras-holdings-have-shot-up-among-young-households/
3. https://www.irs.gov/retirement-plans/plan-sponsor/types-of-retirement-plans