Small Business Employee Retirement Plan – The Bottom Line

Small Business Employee Retirement Plan – The Bottom Line


Figuring out your own retirement is enough of a headache, so it’s understandable if the idea of setting up an employee retirement plan gives you cold feet.

But small business retirement plans aren’t just a nice thing to do for your staff — they can also help your bottom line in several important ways. Here’s how a workplace retirement plan could help your business, and what you should consider before setting up a plan.

Better Recruiting

In today’s tight labor market, it’s a battle for the best employees. A workplace retirement plan can give your company an edge against the competition.

According to the Employee Benefit Research Institute, employees rated retirement plans as the number two most valuable workplace benefit for deciding whether to accept a job offer or stay at their existing company. Only health insurance was rated as more valuable.

While most employers offer health insurance, it’s not as common for small businesses to offer employee retirement plans, so this is a chance for your business to stand out.

Tax Savings

Setting up a workplace retirement plan can also lower your taxes. You can deduct the cost of setting up and administering your program. You can also deduct whatever you give employees for matching contributions — when you agree to add money to an employee’s retirement plan whenever they contribute. For example, you add 50 cents for every dollar they save. These tax savings can help offset the cost of running your plan.

Help for Your Own Retirement

A workplace retirement plan isn’t just there for your employees. It’s also a great way to build your own nest egg. When you add money to your retirement account, you can deduct whatever you contribute from your taxes. You can also delay taxes on your investment gains until you take your money out. These are the same perks you’d receive from an Individual Retirement Account (IRA) outside of work.

With a workplace plan, you can save much more. With a regular IRA, you can only save up to $5,500 per year, or $6,500 if you’re 50 or older, as noted by the IRS. With a workplace plan, you may be able to save up to $55,000 per year depending on the type of plan.

A woman evaluates small business retirement plans on a tablet

Potential Downsides

A workplace retirement plan may not be the right move for every small business because of the potential downsides. To set up and manage a plan, you may need to pay fees to an investment broker. Retirement plans also usually require that you provide matching contributions for your employees. The amount you’ll owe per year in expenses and matching contributions depends on the type of plan you pick and the way you design its benefits.

On top of cost, there’s extra administrative work that comes with managing employee retirement plans. You’ll need to file paperwork with the IRS and provide employees with plan documents so they understand what they have available. Be sure to weigh the recruiting benefits and tax savings of offering a plan against these downsides.

Types of Retirement Plans for Employees

There are a number of possible small business retirement plans. Here is a brief overview of three of the most popular:

  • Simplified Employee Pension (SEP) IRA — This is a low-cost plan to set up and administer. Some brokers offer SEP IRAs for free. However, these plans have the most expensive matching rules for employees, which can be costly as your business expands. Fortunately, there is some flexibility as you are not required to add money every year to a SEP IRA.
  • SIMPLE IRA — This is a moderate-cost workplace retirement plan. Brokers likely will charge a fee to set up and run these plans. You do need to provide matching contributions for employees, but the percentage is not as high as with a SEP IRA. However, there’s not as much flexibility because you need to provide money for employees every year.
  • 401(k) — 401(k) plans are the most expensive to set up and administer. The more employees you have, the more a 401(k) makes sense because you can spread the high fixed costs over more people. These plans don’t require employee matching requirements and you can even set up a 401(k) with no match.

To pick the best option, you should consult with a financial advisor who specializes in setting up small business retirement plans.

Retirement sneaks up on people and the average American often doesn’t save enough. With a workplace plan, you show employees that you care about their future. When you do that, chances are your employees will care more about yours.