(This column originally appeared in the Philadelphia Inquirer)
A 2023 survey conducted by the Society for Human Resource Managementfound that retirement benefits are the second most popular employee benefit offered by most employers other than health insurance. Unfortunately, data from the Small Business Administration reveals that only a little more than half of businesses with fewer than 25 employees offer these benefits.
“In these times of tight employment, many small businesses could be losing the ability to hire (and retain) great workers because they’re not providing retirement benefits,” said Mark Zinman, a certified public accountant and the managing partner at Zinman & Company in Southampton. “Retirement plans are not just a benefit for older workers — these are savings plans that help employees of all ages.”
If you’re running a small business and you’re considering offering (or changing) a retirement plan benefit for your employees, here are the four most popular options to consider.
With a traditional 401(k) plan, you and your employees have the option to contribute money to a tax-deferred account that usually has multiple investment options. These contributions — which can be as much as $66,000 this year combined for both employee and employer match — are tax deductible. Traditional 401(k) plans are the most flexible of all the retirement plan options, and allow loans, protection from creditors, and the ability to contribute to after-tax Roth savings accounts.
However, these plans are also the most expensive because they require both annual tax and regulatory filings as well as “discrimination” testing to ensure that contributions to the plan from both higher- and lower-paid employees are equitable. Just about any type of business entity — from a corporation to a sole proprietorship — can set up a 401(k) plan. Participants over 50 years old can also make additional “catch-up” contributions.
“While these plans are the most well-known, it’s OK if you don’t want to offer a traditional 401(k) retirement plan,” says Sonya Pappas, a partner at the GSM Advisory Group in Swarthmore. “As your business evolves, you can eventually expand into one. But there are plenty of other options.”
Both Pappas and Zinman point out that if you can accept a little less flexibility in exchange for lower costs, and your company has less than 100 employees, then a Simple 401(k) may be a better option. With this plan your assets are still protected, but you only have to file a tax return and there’s no discrimination testing required.
Participants can take advantage of other 401(k) benefits like making catch-up contributions, borrowing from their balances, and contributing to a Roth plan. But there are a couple of drawbacks. One is that contributions are less than a traditional 401(k) plan. More importantly, employers are required to provide up to a 3% match for any employee contribution.
“Although it’s required to match, your costs are capped, and you still have almost no administrative costs with a Simple 401(k),” said Zinman. “It’s a good option for very small businesses, and when you grow larger you can easily move to the traditional plan.”
Just because you’re an individual freelancer or independent contractor doesn’t mean there’s not a 401(k) option for you. Zinman advises these clients who have a savings mindset but are not entirely sure where their business is heading, to start saving for retirement in a solo 401(k).
With a solo 401(k), you can enjoy most of the benefits of a traditional 401(k) plan with almost no costs. These plans are only for individuals (and a part-time spouse), but, like a traditional 401(k), you can still contribute up to $66,000, take loans, and have Roth options. There’s no discrimination testing or separate tax returns required (unless your balance exceeds $250,000), and like the other 401(k) plans, there are catch-up provisions provided if you’re over 50.
“You can also wait until the end of the year to fund it,” said Zinman.
There are individual retirement accounts (IRAs) for people that want to save for retirement on their own. But there’s also a SEP (Simplified Employee Pension) IRA, which is for an employer that has very few employees and wants to offer some type of retirement savings with very low administrative costs.
SEP plans do not require discrimination testing or having to file a separate tax return. Under this type of plan, and like a 401(k), you can put away up to $66,000 per participant. However, there are no catch-up contributions, your assets are not as protected as a 401(k), and whatever percentage of compensation you contribute for yourself, you have to make the same contribution for your participants.
Pappas says SEP IRAs are a “good opportunity” if you don’t plan on having any — or many — employees or if you’re just going to have family members employed.
“This type of plan really allows you to put away a large amount of money,” he said. “Many of our clients feel more comfortable with these plans because they’ve had individual IRAs in the past.”
There are plenty of retirement plan options for a small-business owner, but the choices can be complex. It’s important to talk to your accountant, your payroll company, or any wealth or investment manager, and they can help you decide which plan is best for your business, and then help you get it set up.
“It’s an important investment for the business owner, and a very important benefit to provide to employees,” said Zinman.
