According to the Census Bureau, only 45 percent of workers at companies with 1 to 49 employees had access to a retirement plan. This percentage jumped to 76 percent at companies with 50 to 99 employees, and to 90 percent for companies with 100 or more employees. What can small businesses do to improve their numbers and fall in line with larger employers?
Why you need a retirement plan
If you don’t yet have a plan, you probably should think seriously about starting one. There are several big reasons:
- Owner’s retirement savings. Small business owners may think that their business, through a sale, will be the nest egg for their retirement. Unfortunately, this can prove to be erroneous. Changes in the marketplace may undercut the value of a business. Or when it’s time to retire, the economy may be unfavorable to a profitable sale.
- Employee retention. According to a Towers Watson survey several years ago, 35 percent of employees said retirement benefits were a key reason for taking a job, and 47 percent said retirement benefits were an important reason for staying on the job. In this tight job market, it’s likely these statistics are even higher.
- Employee retirement savings. It’s a reality that employees need to save for their own retirement. Employers can help by giving employees access to a qualified retirement plan, which enables them to save on a tax-advantaged basis. And employees may be eligible for a personal tax credit tied to their plan contributions.
- Employer tax breaks. Contributions on behalf of employees are fully tax deductible up to set annual limits. What’s more, employers may be eligible for a tax credit, as will be explained later in this post.
How to choose the best retirement plan option
As a small business, there are many retirement plans to choose from. The one best-suited to your situation depends in large part on what your company can afford. Some are funded entirely by employer contributions, some entirely by employee contributions and some by a combination of both.
The IRS has a comparison of retirement plan options for small businesses. These include:
- IRA-based plans
- Payroll deduction IRAs
- SIMPLE IRAs)
- Defined contribution plans
- Safe harbor 401(k)
- Automatic enrollment 401(k)
- Traditional 401 (k)
- Defined benefit (pension) plans
Note: The ability of small businesses to offer retirement plans with less administrative cost and less regulatory and administrative complexity to them may soon be possible. Under a recent executive order, multiple employer plans for small businesses may be developed. More guidance on this from the IRS is expected next year.
Get a tax credit for setting up a plan
If you don’t yet have a plan but set one up to cover at least one employee who is not an owner or spouse, who would be called “a non-highly compensated employee”, and you don’t have more than 100 employees, then you may be eligible for a tax credit for small employer pension plan startup costs. While the name of the credit implies it’s for a pension plan, it can be used for a 401(k) or any other qualified retirement plan. The credit is 50 percent of startup costs up to a top credit of $500. The credit can be claimed for the first three years of the plan. And you can even start to claim the credit in the year prior to the start of the plan.
Give notice of plan participation to employees
Generally, you must give notice to employees of their eligibility to participate in a plan. The time frame for the notice and the required content depends on the type of plan offered.
For example, in the case of a SIMPLE IRA, you must give each employee the following information before start of the election period, which is generally from November 2 through December 31 for a plan starting on the following January 1:
- The employee’s opportunity to make or change a salary reduction choice.
- The employer’s type of contribution (matching contribution, which is keyed to the employee contribution, or nonelective contribution, which is independent of any employee contribution).
- A description of the plan from the financial institution hosting it.
- A written notice that the employee’s balance can be transferred without cost or penalty if the employee uses a designated financial institution.
Business owners have many demands on their limited dollars: giving raises to employees, investing in new equipment, expanding to new locations, spending on marketing and more. But retirement savings should become part of the budget for all businesses.
Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser’s Small Business Taxes, J.K. Lasser’s Guide to Self-Employment, and Smooth Failing as well as a trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® and host of Build Your Business Radio. She has been included in the List of 100 Small Business Influencers for three years in a row. Follow her on Twitter: @BarbaraWeltman or at www.BigIdeasforSmallBusiness.com