Is Your Small Business Responsible for Employee Retirement?

When it comes to employee benefits offerings, small businesses face a bit of a dilemma. Without a doubt, companies that offer an impressive list of benefits attract more skilled job applicants. But, benefits are far from free. Depending on the size of your company, you may have to provide health insurance by law (depending on what happens with the law, of course). With the exception of Illinois, which just instituted the first-of-its-kind Illinois Secure Choice Savings Program Act, however, retirement plans are not typically legally mandated.That said, even a young workforce might appreciate a program that helps them to save money for their futures, whether they can apply that money toward retirement or, in some cases, maybe a down payment on their first house. If you want to offer extra security to your employees, then it’s time to learn your options.

Small Businesses Have Several Basic Retirement Plan Options

Of course, virtually anyone not covered under an employer retirement plan can save for retirement through their own Traditional or Roth Individual Retirement Accounts (IRAs). Your small business can also offer one of the following types of retirement plans.

Simple IRA

This option essentially allows your business to contribute to employee accounts that resemble traditional IRAs. As long as  your business employs no more than 100 employees and you offer no other qualified retirement plan, employees earning at least $5,000 can contribute pre-tax dollars to one of the following types of plan:

• If employees will make their own investment decisions without any contribution requirements from your business, you can set up a Simple IRA with IRS Form 5304-SIMPLE. This form explains all requirements, including the need to reduce each participating employee’s reported income by the contributed amount.
• If you want some or all of employee contributions allocated to your company’s choice of investment account, you can use IRS form 5305-SIMPLE to get instructions and set it up. Of course, you also have to work with an appropriate financial institution to make arrangements.

In many cases, businesses pay no costs to set up Simple IRA offerings, other than the employer contributions that they may make to incentivize employee retirement savings. Even when companies pay some fees, however, that money represents a write-off under current tax laws.

Simplified Employee Pension Plan IRA (SEP IRA)

You can set up this type of plan for employees who meet certain eligibility requirements, including (but not limited to) a minimum age of 21, employment history with your company of at least three of the last five years and participation by all qualified employees, who must have their own traditional IRAs. In essence, you set up SEP IRA plans so that you can make employer contributions to employees’ own traditional IRA plans; employees make no contributions under this type of plan.IRS Form 5305-SEP is primarily an instruction sheet for plan setup and defines the rules that you must follow and a full list of qualifiers. In fact, you do not need to file this form; you must provide a copy to every employees who is qualified to participate and also retain a copy for your company records. But, while setup seems easy on the surface, there are certain downsides. Perhaps the most notable downside is that, if even one qualified employee rejects participation, your business cannot offer the plan to anyone.

401(k) and Defined Benefit Plans

Let’s start by taking defined benefit plans (typically pension plans) off the table because they are seldom offered in the private sector, particularly by small companies. Even if they are very attractive to employees, they work by offering a guaranteed retirement benefit, and requiring businesses to fund them to meet that future need. Since there is no guarantee that investment returns will meet those needs, they are risky for any sized business.Most companies switched from pension plans to 401(k) offerings when they were created in the late ‘70s. With certain limitations, employees can make contributions to these  plans often choosing between pre-tax dollars in a traditional 401(k) or taxable dollars in a Roth 401(k). The company may or may not make some form of matching contribution. Although employees get some limited investment choices, employers control the investment options for these plans. And, since there is no guarantee of outcomes for most investments, there is no guarantee of a fund’s value at retirement time.While 401(k) plans are generally most appropriate for larger companies due to the setup costs and regulatory considerations, sole proprietorships or partnerships with no other employees might consider  setting up a Self-Employed 401(k).As a general rule, Self-Employed 401(k) plans are most appropriate when you want to make company contributions to accounts or when you want higher employee contributions to be an option (for example, employees less than age 50 can contribute $18,000 annually to a traditional 401(k), vs. $5,500 for a traditional IRA). Still IRA plans require little (if any) effort on the part of the employer.

Learn All Risks Before Making any Decisions

Understand that offering retirement benefits to employees is not without risk. One major concern involves employer contributions (when permissible based on the type of plan). Once you set up a plan, those contributions are generally mandatory, regardless of your company’s financial health at any given time.Also, retirement plans are heavily regulated by federal law, with possible additional state requirements. A business attorney or CPA may provide some guidance, but you really need to do your own research for IRA options by carefully reviewing the above-cited form instructions and any other information provided by the IRS.401(k) plans require you to engage a plan administrator, but this is really part of selecting a reputable financial firm that is equipped to handle the details. In fact, even some payroll firms like Paychex handle company retirement plans.Fidelity Investments and Vanguard are both well-known as solid financial firm choices, but there are many other companies that might suit your needs. Proposals from these companies are free, which allows you to compare options and costs (which are often hidden in the fund fees and may be as much as double the average costs, so be sure to check all numbers carefully). Once you make your choice, the company will make setup and compliance simple matters for you.

Done Right, Retirement Plans Can be a Low-Cost Enticement for Prospective Employees

At one time, younger employees saw little value in retirement benefits, but today’s young workforce is generally better educated in these matters. Your business may not have the funds to offer top-notch health care plans, tuition reimbursement or other benefits offered by your larger competitors. But, if you meet the requirements, retirement benefit offerings might attract employees with the skills needed to help grow your business.First, make sure that you fully understand how they work — and any associated risks. Then, be prepared to sell the value of your retirement plan to the employees that you want to hire. A growing company that shows concern for employees’ long-term futures might be an attractive place to set down roots.