By Brenda LaMarche / Guest Column
When it comes to attracting and retaining top talent, a retirement plan is a great feature to add to your company’s benefits package. Setting up a retirement plan doesn’t have to be a difficult, scary or expensive proposition; with a little background knowledge, you can choose the right type of plan for your business and work with a vendor to make it a reality.
With retirement now stretching as many as three decades past your last day of work, many employees are looking for help investing their nest egg. Most guidelines indicate that you will need 80 percent of your current annual income to retire comfortably. Today’s average Social Security Administration payout is $1,200 per month, however it is uncertain how long this program will be available to people aged 65 and over. The increasing cost of health care also must be considered when planning for retirement.
Small business owners can also benefit from retirement plans in a variety of ways. Consider that:
- Employer contributions are tax deductible
- Assets in retirement plans grow tax free
- Plans are available with before-tax and after-tax options
- Tax credits and other incentives for starting a plan may reduce costs
- Owners may be able to contribute more in some plans versus an individual IRA each year
An employer setting up a retirement plan has some responsibilities, however. They must make sure plan documents are given to employees at the time of enrollment and annually after that. By law, funds withheld from employee paychecks must be deposited in a timely fashion each pay period. And finally, benefits have to be made available when an employee leaves or retires.
While there are numerous retirement plan options ranging from IRAs to 401(k)s, businesses with fewer than 20 employees may not need the complexity of a 401(k). Larger businesses generally consider the 401(k) because of the many options it provides, although the complexity and cost of setting up one up are less attractive for very small businesses.
The SIMPLE IRA has become a popular choice among small businesses. SIMPLE stands for Savings Incentive Match Plan for Employees. The administration of this plan is straightforward, affordable and easily set up through a multitude of vendors.
The SIMPLE IRA requires an employer to match 100 percent of an employee’s pre-tax salary deferral up to 3 percent. This plan type has fewer regulations, which streamlines administration. The IRS sets the contribution limits lower than 401(k) plans, but as financial experts note, every little bit counts.
The SEP IRA is a simplified employee pension plan that can be treated like a profit-sharing program. This may be more suited to a partnership type of business. The two business owners could use a SEP IRA to contribute up to a quarter of their salary to save for their own retirements, for example.
However, for businesses with multiple employees, there are pros and cons to a SEP IRA. The employer is required to deposit money into the plan regardless of employee participation and all eligible employees benefit from that. Some employers like this because it encourages long-term employment, but they are obligated to contribute whether employees stay or not. Employers also should be aware that the SEP IRA is taxable as ordinary income.
The popular Roth IRA can be included in retirement plans to provide a tax-free option for the growth of funds as well as withdrawals at retirement. There are fewer restrictions on the investments that can be used, which can include securities, common stock and bonds.
For my small business with seven employees, I chose a SIMPLE IRA plan. I want to offer my employees a benefit that is of value to them and that I can afford. It’s all about keeping your employees happy so they can continue to have financial stability and focus on what they do.
For more information about retirement plans for small businesses, visit the SCORE website at score.org.
Brenda LaMarche is the president and founder of BRL HR Consulting, based in Coralville.