A well-designed retirement plan can help your company attract employees. It may be the difference that sways candidates your way. Retirement plans add value by enhancing employee benefits, offering tax efficient savings, and improving retirement outcomes for employees.
Selecting the optimal retirement plan for your business and employees takes forethought. It is important to clarify your objectives, both as an employer and for you personally if you are the owner. What do you want to accomplish and why? With that understanding in mind, you can better evaluate options.
As a business leader, your time is best spent on strategies to increase sales or service to your clients, not orchestrating employee benefit plans. This is where a financial professional can add value, including helping you evaluate options and answer the question, “Which type of retirement plan best fits your business?”
If you have yet to develop a retirement plan for your business, or if you're not sure the plan you've chosen is the right one, here are some questions to consider.
How much can my business afford to contribute?
- A Simplified Employee Pension (SEP) IRA is funded by employer contributions only. SEP contributions are made to individual IRAs for eligible employees. The business decides annually the percentage of employee compensation to contribute.
- Savings Incentive Match Plan for Employees (SIMPLE) IRAs include both employee and employer contributions. Employers match employee contributions either up to 100% of the first 3% of compensation or 2% of each eligible employee’s compensation.
- 401(k) plans also include employee and employer contributions. The range of employer contributions can vary significantly depending upon objectives, plan design and whether or not a profit-sharing contribution is made.
Which plan accommodates high employee turnover?
The expense risk of covering short-tenured employees may be mitigate some by eligibility requirements and vesting.
SEP-IRA - Only employees who are at least 21 years old, earn at least $650 in compensation, and have been employed in three of the last five years must be covered.
SIMPLE IRA - Must cover employees who have earned at least $5,000 in any prior two years and are reasonably expected to earn $5,000 in the current year.
401(k) - Eligibility requirements may limit coverage to employees who are at least 21 years old and worked 1,000 hours within a year or to those who worked at least 500 hours per year for three consecutive years.
Vesting is immediate on all employer contributions to the SEP and SIMPLE plans. Vesting of employer contributions to 401(k) plans vary by plan design.
Which plan is best to maximize contributions for owners?
The SEP IRA and 401(k) plans offer higher contribution maximums than the SIMPLE IRA. The maximum dollar limit for all contributions combined across employee and employer for a plan participant in 2022 is $61,000.
How do administration costs and efforts compare?
The SEP IRA and SIMPLE IRA are straightforward to establish and maintain. The 401(k) plan has more elements to it, including annual compliance testing. While the cost of a 401(k) is higher for start-up plans than the SEP and SIMPLE, the differences are often not enough to outweigh the benefits, including tax savings, if the features, flexibility and higher maximums of a 401(k) best align with your objectives.
Working with a professional can make the evaluation and decision-making process much easier as you seek the most attractive retirement plan for your business, one that may be exactly what your next hire is seeking.