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When, How and Why Your Small Business Should Offer a Retirement Plan

As a small business, there’s no exact answer to when you should offer employees a retirement plan. However, you’ll quickly find that for many potential hires, this benefit is non-negotiable. 

When you’re ready to attract the best candidates with a competitive work environment, it’s time to set up a workplace-sponsored plan. Lucky for you, there are a variety of options with benefits and tax advantages for small businesses.

Pros of an employee retirement plan

Offering a retirement plan is the right thing to do for your employees. It gives them a sense of value and financial security. But the decision comes with benefits for you too. For instance, the financial comfort can increase productivity for employees no longer stressed about their futures. You’ll also find it helps you:

  • Compete with larger employers.
  • Outshine other small businesses. 
  • Start your own retirement plan.
  • Hire and retain valuable talent.

Taking advantage of tax incentives 

To incentivize offering workplace-sponsored retirement plans, there are tax advantages for small business owners that qualify. The tax credit of up to $5,000 for three years covers set up costs for certain plans.

Qualifications include:

  • Having 100 or less employees you paid at least $5,000 in the last year
  • Having at least one participating “non-highly compensated employee” (NHCE)
  • In the three years leading up to your first year of eligibility, having a substantial amount of employees that didn’t receive contributions or benefits through another plan sponsored by you, a group you’re part of, or a predecessor

Meeting all three qualifications, you can claim the tax credit, covering 50% of your startup costs: either the greater of $500 or the lesser of 1) $250 times the amount of NHCEs able to participate or 2) $5,000.

An extra $500 credit is available for employers that include auto-enrollment in their plan. Together, these credits make starting a workplace retirement plan significantly less expensive. 

Finding the right retirement plan

While most employee retirement plan options are either 401(k)s or individual retirement accounts (IRAs), there are a variety of options, each suited for a particular situation.

A payroll deduction IRA is a simple option for letting employees contribute to a retirement plan. Contributions are made through payroll deductions of up to $6,500, or $7,500 for employees over 50.

A traditional 401(k) allows employees to defer high amounts of their salary for retirement, up to $22,500 or $30,000 for those over 50. It also allows for hefty employer contributions. However, annual discrimination testing is required. 

A safe harbor 401(k) is similar to a traditional 401(k) — without annual discrimination testing. It’s often the best choice for high-earning owners and employees investing aggressively in retirement.

Profit sharing is the best option for large contributions, as employers can offer the lesser of 100% of compensation or $66,000.

A SIMPLE IRA (savings incentive match plan for employees) is for employers with less than 100 employees, wanting to keep costs low. Employees can contribute the most of any IRA, and employers must match 3% or contribute at least 2% of compensation. 

An SEP IRA (simplified employee pension) is a low-maintenance option that only allows employer contributions. Employers can decide whether to contribute each year — 25% of an employee’s compensation, up to $66,000 — which is key. 

Not sure which plan is best for you? Talk to a CPA about your options. 

What you’ll pay

In addition to your employer contributions, the cost per employee varies by plan provider, including setup, service and maintenance fees. Some types — like an SEP or SIMPLE IRA — require zero setup fees. Providers working with small businesses often offer less expensive, all-inclusive options.

Remember, for businesses that qualify, setup fees are covered by tax incentives. 

Getting started

With all this information, we’ve only scratched the surface. Since most business owners don’t have time to become financial advisors, it’s best to make this decision with an experienced CPA. 

At SME CPAs, our staff specializes in financial services for small businesses, auditing internal processes for peak performance. Whether you run a non-profit or a restaurant, we’ll help you provide the best employee experience without jeopardizing your business. 

Investment advisory services are offered through Avantax Planning PartnersSM. Commission-based securities products are offered through Avantax Investment ServicesSM, Member FINRA, SIPC. Insurance services offered through licensed agents of Avantax Planning Partners. 3200 Olympus Blvd., Suite 100, Dallas, TX 75019. The Avantax entities are independent of and unrelated to SME CPAsAlthough Avantax does not provide or supervise tax or accounting services, our Financial Professionals may offer these services through their independent outside business. Not all Financial Professionals are licensed to offer all products or services. Financial planning and investment advisory services require separate licenses.

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