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Retirement Plans: A Guide for Business Owners

April 30, 2021

Setting up a retirement plan is one of the best ways to ensure your business is helping you and your employees build a financially secure future.

Unfortunately, the smaller a business is, the less likely it is to offer a retirement plan. According to the SCORE Association, just 28% of businesses with fewer than 10 employees offer retirement plans. Small-business owners often cite factors like administrative responsibilities, the cost of maintaining a retirement plan, and lack of employee interest as reasons they haven’t set up a plan.

But whether you’re a self-employed worker or have a sizeable team, setting up a retirement plan could be a valuable investment for your business. Sponsoring a defined-contribution plan offers some great benefits, including the ability to make regular company contributions to your own retirement savings while providing tax-deferred growth for your (and your employees’) retirement nest egg.

Adding a retirement plan to your benefits package can also help you attract top talent and support job satisfaction among staff, which can mitigate the costs and lost productivity that may come with high employee turnover.

For your business, retirement plan contributions and related expenses are tax-deductible, and there is a tax credit to help eligible small businesses with the startup costs.

Which Plan Is Right for Your Business?
Before choosing and setting up a plan, you’ll need to consider these factors:

  • The size of your business and team – do you have a large staff, or is it just you and your spouse and/or business partner?
  • Whether or not you want employees to contribute through payroll deductions
  • Amount of your company’s matching contributions (if applicable)
  • Your capacity to handle new administrative responsibilities and expenses
  • Your own savings goals as a business owner

You’ll also want to consider how much participation you can expect. For example, employees under age 30 or with lower wages may be less likely to set aside some of their paycheck in a retirement plan than those who are closer to retirement.

Many businesses choose one of these three types of retirement plans.

This IRA-based plan is designed for companies with no more than 100 employees, and it is less cost- and labor-intensive than other plans. The financial institution you partner with to manage the plan will do most of the paperwork.

For the 2021 tax year, participants can contribute up to $13,500 in pretax income (plus an additional $3,000 in catch-up contributions for employees age 50 or older).

Employers are required to contribute by matching employees’ contributions (up to 3%) OR by making a fixed contribution of 2% of each eligible employee’s gross pay. All contributions are immediately fully vested.

Compared to a SIMPLE IRA, a traditional 401(k) plan offers employers more features and the ability to design the plan around their needs. However, it also comes with more paperwork and costs, and sponsors of a traditional 401(k) must also perform annual compliance tests (an experienced plan administrator can help with this).

For the 2021 tax year, plan participants can put away up to $19,500 in pretax dollars (plus an extra $6,500 in catch-up contributions for ages 50 and up). Like the SIMPLE IRA, employees can decide how much to contribute. But unlike a SIMPLE IRA, 401(k)s are not limited to businesses with 100 employees or fewer, and there is no employer contribution requirement, though many employers do make additional contributions, such as matching contributions.

If you’re a sole proprietor and have no employees (other than your spouse), an individual 401(k) is also an option. This may provide more flexibility than a SEP IRA (see below), including the ability to make catch-up contributions after age 50.

If you’re self-employed or have only a few employees, a Simplified Employee Pension (SEP) IRA could be a smart option.

Unlike a SIMPLE IRA, a SEP is funded solely by employer contributions (though employees may also make individual contributions to a traditional IRA), and the annual funding requirements are flexible. Note that each employee must receive a contribution that is the same percentage of their salary, up to 25% of their total compensation, with a maximum contribution of $58,000 per employee in 2021. Like the SIMPLE IRA, the SEP IRA is easy and affordable to set up and maintain.

Making the Most of Your Retirement Plan
A great retirement plan is one of the most valuable benefits you can offer your employees, so you’ll want to communicate its benefits to staff and encourage them to take part. You will also want to educate them about why they should contribute at least enough to take full advantage of your employer match, if you are offering one, and remind them about the 10% IRS penalty for taking early withdrawals from their retirement plan (i.e., before age 59 ½, with certain exceptions).

To help you navigate the complexities of company retirement plans, and choose the best option, it’s important to work with an experienced partner.

Here at Ephrata National Bank, we’re committed to the needs of local business owners and their employees. If you’re ready to set up a retirement plan, turn to our seasoned Retirement Plan Consulting team. With expertise in managing a variety of plans, and helpful retirement planning guidance for employees, we’ll help you make the most of your plan, while minimizing the work for you.

The information in this article is for general information purposes only. For tax information and guidance relative to your specific situation, please consult your tax advisor.