Do you and your employees feel comfortable with how much you have saved for retirement? Do you feel that you are currently taking advantage of all of the potential retirement plan benefits that are available to you? Is the current plan that my business sponsors or that I participate in right for me?
These are the types of questions that should be considered when you are evaluating the status of your or your business’s plan for retirement. This article will provide a brief guide on a few of the common options that you have as an individual or business owner for retirement savings along with the ramifications, good or bad, that come with each option.
401(K) Plans
Invented as we know it in 1978 the 401(k) is a defined contribution plan that offers benefits to both the employer and the participant. The 401(k) plan is now the most common retirement vehicle in the U.S. with over half of U.S. workers participating in a 401(K) plan. A 401(k) plan allows an employee to defer a portion of their salary on a pre-tax (in some cases after-tax (Roth)) basis towards a retirement account. Additionally, employers have various potential options for contributing to the plan on behalf of the employee. 401(k) plans are an attractive benefit to employees and offer businesses a chance to increase retention with vesting options. Below is a list of pros and cons of sponsoring a 401K plan:
| Pros: | Cons: |
| Offers multiple different contributions options for employers: Traditional employer match, Profit Sharing, Safe Harbor (employer offers a specified match or contribution for all employees) | Typically requires employee benefit advisor or financial institution to assist in the establishment the plan |
| Often allows employees to contribute pre-tax or post-tax (Roth) Contributions. | Must file annual form 5500 to report plan activity |
| High contributions limits: Employee – $22,500, employer and employee combined – $66,000 (as of 2023) | Opens up employer to additional DOL regulation |
| Powerful employee recruiting and retention tool with vesting options | Can lead to audit requirement for plans with over 100 participants |
| Ability to permit loans from account | Early withdrawal can be subject to additional tax |
| Up to $16,500 in tax credits on contributions and administrative expenses for businesses with less than 100 employees | Often requires significant administrative input from employer |
SEP (Simplified Employee Pension Plan)
A SEP plan is a form of an IRA that allows an employer to contribute to a retirement account on behalf of an employee. Contributions are made at owner discretion with flexibility on timing and amounts. This flexibility can be beneficial for businesses with cyclical cash flows and off seasons. A SEP plan can be a powerful tool for a business owner that wants to offer competitive retirement benefits with room for large employer contributions without the administrative burden that comes with something like a 401(k) plan. Below is a list of pros and cons of sponsoring a SEP plan:
| Pros: | Cons: |
| Easy to set up and maintain – minimal costs and no annual filing requirement for plan | Employer contributions only |
| High contribution limits – up to 25% of compensation but no more than $66,000 as of 2023 | Employer must contribute equally for all eligible employees |
| Contributions made at owner discretion on a year to year basis | Participants cannot take loans from SEP plans |
| Available to any employer with one or more employees | Early withdrawal can be subject to additional tax |
SIMPLE IRA Plan (Savings Incentive Match Plan for Employees)
A SIMPLE IRA Plan is a traditional IRA that allows for contributions from both employees and the employer. Employers are required to contribute a matching contribution of up to 3% of compensation or a 2% nonelective contribution. Start up and administrative costs can be minimal with SIMPLE IRA Plans making them a more attainable option for new and small businesses. A SIMPLE IRA plan can be a useful tool for a small business to offer basic retirement savings with employer and employee contributions while avoiding the administrative burden of something like a 401K plan Below is a list of pros and cons of sponsoring a SIMPLE IRA Plan.
| Pros: | Cons: |
| Easy to set up and maintain – minimal costs and no annual filing requirement for the plan | Lower contribution limits than other retirement plan options (maximum 3% of compensation by employer and $15,500 by employee as of 2023) |
| Employees can be granted the option of choosing which financial institution contributions are sent too | Inflexible employer contributions |
| Encourages participation with employer matching contributions | Only available to employers with 100 or fewer employees |
| No discrimination testing required | Participants cannot take loans from SIMPLE IRA Plans |
Payroll Deduction IRA
A Payroll deduction IRA is a very simple arrangement where an employee sets up a Traditional or Roth IRA and authorizes a payroll deduction for contributions to the account. The payroll deduction IRA puts the full responsibility of saving on the employee and is one of the least burdensome options for an employer. A payroll deduction IRA is a less attractive benefit that can be offered to employees; however, it can be a useful saving tool for individuals who do not have other retirement saving options. Below is a list of pros and cons of the establishment of a payroll deduction IRA:
| Pros: | Cons: |
| Easy to set up and maintain – no plan document requirements, minimal to no cost for employers, no filing requirements | Subject to normal IRA contributions limits ($6,500 as of 2023) |
| Can be offered to any employee, no offering requirements | Limited amount of goodwill created with employees when compared to other retirement plan options |
| Employees can establish accounts at financial institution of their choice | No deduction for the business |
| Available to any business, including self employed | No contribution options for employer |
The above is a list of some of the more common defined contribution and IRA based plans available to employers. The pros and cons of each plan should be considered when determining what is the right fit for your business There are additional types of employee benefit plans not listed, including defined benefit plans, that might be the right fit for your business.
Now that we have looked at a few options, which employee benefit plan is right for you and your business? This is a question that that is often answered with the age-old response of “it depends”. Every business is different, there is a no one size fits all plan for retirement planning, an employee benefit plan should be tailored to the needs of each business and its employees. Establishing an employee benefit plan or evaluating your current plan can lead to financial benefits for both employers and employees along with supporting the goodwill and peace of mind that individuals are set up for a better future. That said, retirement plans can come with administrative requirements and regulation, and it is important that businesses and individuals do not establish/enter plans that that don’t align with their financial goals.
Speaking to a financial professional is often a good starting point if you have questions about what plan might be right for your business. The IRS website also offers extensive information on employee benefit plans along with the steps needed to establish one. Standards and practices are ever evolving and there is never a bad time to re-evaluate the state of your business and the future of your employees.
If you have any questions or would like to speak to us directly about employee benefit programs, contact us at rwr@bspcpa.com.
Written by, Matthew Mernan, In-Charge Senior Accountant