Which Type of Retirement Plan Should You Offer?
The present and the future.
Good employers care about their employees – not only their current circumstances and their work responsibilities, but also their futures.
But for small businesses, offering retirement benefits may be challenging. Even if you want to offer such a plan, deciding which one may be a good fit can be confusing.
We’re here to walk you through some of the top options for retirement plans you can offer your employees.
A traditional 401(K) typically makes sense when an employer wants the ability to contribute more than what is allowed under a Simple IRA Plan, which is limited to $13,000.
Contribution limits are high for a 401(K) plan: Eligible employees can contribute $19,000 to their 401(K) in 2019. If the employee is over 50 years of age, an additional $6,000 can be contributed in 2019. Employers have the option of providing matching funds to employees up to a certain percentage of earnings, for example, a 100% matching contribution for up to 3% of an eligible employee’s contribution or a 50% match for up to 6% of an eligible employee’s contribution. These kinds of matching programs are not required wen offering a 401(k).
A 401(K) can have some of the highest management costs of available retirement plan options, including administration fees, custodian fees, and recordkeeping fees among others.
There is flexibility within a 401(K) in that an employer can set eligibility requirements and a vesting schedule, as well as adjusting the match as needed.
Roth 401(k) plans are also available. Employee contributions to Roth 401(k) funds are taxed at the time of deposit and then there is no tax at the time on withdrawal, meaning that employees do not pay taxes on the growth of the fund dollars. If an employer matches employee contributions to a Roth 401(k), the matching funds are placed in a traditional 401(k) and taxes are deducted when the employee withdraws the money from the fund, not at deposit.
Safe Harbor 401(K)
This can be useful for companies that are worried that highly compensated employees may be limited in what they can contribute based on the annual compliance testing. The safe harbor ensures that the plan automatically passes the annual compliance and top-heavy tests and allows business owners, and highly compensated employees, to maximize contributions to the plan.
To provide this plan, employers must agree to match 100% of the first 3% of each eligible employee’s contribution and 50% of the next 2%. Conversely, an employer can opt to make a flat 3% contribution to all eligible employees.
This option may work well for self-employed business owners. Only the business owner and a spouse may participate, and there are hardly any administration costs. Some providers allow the solo 401(K) to be invested in other assets such as real estate. A solo 401(K) can easily convert to a Traditional 401(K) later if you hire a team and want to offer it to them as well.
This option is easy to set up, with no IRS filing requirements and no service fees for the employer. For 2019, employees may make salary deferrals up to $13,000. Simple IRAs work particularly well for small to mid-sized employers with fewer than 100 employees, even when not all employees will make salary deferrals.
Simple IRAs come with a requirement to match employee deferrals, dollar-for-dollar, up to 3 percent. There’s an option to lower the match down to not less than one percent, but you must notify employees of the reduction and the limit can’t be reduced for more than 2 years out of a 5-year period ending with and including the year of reduction. Simple IRAs also require immediate vesting, so employers can’t set up a vesting schedule.
This option is great for the self-employed business owner and can be for yourself and a spouse. You can contribute up to $56,000, or 25 percent of your annual compensation, whichever is less. There’s no minimum contribution, either, so you can contribute nothing if you so choose one year. Employees can also participate in a SEP IRA.
A SEP IRA can be used for a very small company, as small as a single, self-employed individual. Employers using these types of retirement accounts must fund employee contributions at the same percentage as they contribute to their own.
Setting up Benefits
Once you have identified the type of retirement plan that might work best for your team, you can look for a provider. You may want to meet with a few local financial advisors or look into a major company such as IFS (include link to IFSgroup1.com).
After finalizing your provider relationship, outline your budget to make sure you have the right fit. You can define your own contributions, understand the fees you’ll be responsible for, and decide on your match if you’ll offer one. You can also define eligibility rules and vesting schedules, and record everything in your plan documents.
As the details are set, you can share the information with employees. Create an FAQ, hold meetings to help explain the ins and outs, and be ready to answer questions or defer to your advisor if needed. Another good idea is to consider auto-enrolling employees who qualify unless they opt out.
As you work through the possibilities for offering a retirement plan, talk to your business mentors and financial experts to help guide you.
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