Choosing a Small Business Retirement Plan That Will Make Your Employees Happy

Just a few years ago, job seekers and employees alike were looking for creative, outside-of-the-box benefits — yoga classes, a beer fridge in the kitchen, napping pods, free lunch Fridays. But today, that’s all changed.

After the economic shutdown of 2020, job seekers and employees are becoming less interested in “nice-to-have” sorts of benefits, and more interested in benefits that offer stability, security and work-life balance. In order to hire and retain star performers in your industry, your benefits need to address those issues. One big one: your retirement plan. 

According to the U.S. Chamber of Commerce, just 53% of businesses with fewer than 100 employees offer retirement plans, but in a tough hiring market, that’s a mistake. It can seriously hinder your chances of attracting and retaining the best people. 

Many small business owners just haven’t gotten around to doing the research and selecting the plan that’s best for them and their valued employees. It’s no wonder. You’re wearing many (if not all) of the hats just keeping the lights on.

Choosing a retirement plan can be confusing, especially if your business has recently grown beyond being a solo effort into employing a handful or more people. How do you pick the right plan for you and your employees? Here’s a primer. 

Two great retirement plans for small businesses are the SEP IRA and the SIMPLE IRA. They give employees the security and stability they crave, and are simple for employers to administer. 

[For more information, watch “Small Business Retirement Plans: Overview“] 

Let’s look at SEP and SIMPLE IRAs in more detail. 

SEP IRA

Simplified Employee Pension (SEP), is designed for self-employed individuals or small businesses with fewer than 25 employees.

The SEP allows for pre-tax contributions toward retirement without getting involved in a more complex qualified plan such as a 401(k). Other facets of the plan: 

• Contributions to a SEP are tax deductible and compound tax-deferred until withdrawn, pending that the distribution is taken after the account holder reaches 59 1/2 years of age. 
• The SEP IRA allows an annual contribution of up to $56,000 in 2019 and $57,000 in 2020. Contributions to a SEP are tax-deductible, and earnings within the account are tax-free until withdrawn. 
• An employer may contribute up to 25% of each employee’s annual compensation (the maximum considered compensation is $280,000 for 2019 and $285,000 for 2020). 
• Any employer — whether a corporation, partnership, or self-employed individual — may establish the plan, even if there is only one employee. 
• Employees must meet ALL of the following requirements: Be at least 21 years of age, have worked for the business during any three of the past five years, and have earned the $600 annual minimum required compensation. 
• Spouses and children may also participate in the plan and open their own SEP IRAs — as long as they are employees of the company and meet the income requirements. 
• Advantages include being less complex and costly than a 401(k), it allows individuals to contribute larger amounts and may qualify for larger tax deductions. 

SIMPLE IRA

Savings Incentive Match Plan for Employees (SIMPLE) is a plan for small businesses, typically with 100 or fewer employees, that have no other retirement plans.

With a SIMPLE plan, contributions are tax deductible and compound tax-deferred until withdrawn, pending that the distribution is taken after the account holder reaches 59 1/2 years of age. Other facets of the plan: 

• Employees are always 100% vested in (or, have ownership of) all SIMPLE IRA money. 
• A SIMPLE IRA allows employee contributions in 2019 of up to $13,000 if you are under age 50, and a catch-up contribution of up to $16,000 if you are 50 or older. In 2020, it allows employee contributions of up to $13,500 if you are under age 50, and a catch-up contribution of up to $16,500 if you are 50 or older. 
• Employers are generally required to match each employee’s salary reduction contributions, on a dollar-for-dollar basis, up to 3% of the employee’s compensation. 
• You can deduct SIMPLE IRA contributions for the tax year within which the contributions were made. 
• You can establish a SIMPLE IRA plan if you meet BOTH of the following requirements: You meet the employee limit (100 or fewer employees who earned $5,000 or more in compensation in the previous year) and you do not maintain another qualified plan, unless the other plan is for collective bargaining employees. 
• You must take into account all employees who were employed at any time during the calendar year, regardless of whether they’re eligible to participate. 
• The SIMPLE IRA plan generally must be the only retirement plan to which you make contributions, or to which benefits accrue, for service in any year beginning with the year in which the SIMPLE IRA plan becomes effective.