Have a small business? Think you’re too small for an employer Retirement Plan? Take a closer look.

May 22, 2020

Have a small business?  Think you’re too small for an employer sponsored Retirement Plan?  Take a closer look.

 

When I ask small business owners about their company's retirement plan, many times the response I get is that they don’t have one because “they’re too small” to have their own plan or that the plans are “too expensive.” 

If you think a 401(k) is your only option to open a plan, and you are indeed a “small” small business, you may be correct.  However, you may want to look at the broader range of retirement plan options to see if you may be able to find a plan type that fits your business better than a 401(k).

 

Remember employer retirement plans offer potential tax advantages to your personal or business income and help increase employee satisfaction and retention.  Additionally, employer sponsored retirement plan contributions are not subject to any income limits, so high earners who may not be able to make pre-tax retirement contributions through personal retirement accounts are allowed to do so in their employer plan.

 

Here is a list of 3 common employer retirement plan types and a quick blurb about each - there are many more details to review should you be interested in looking closer.

 

Simple IRA – for companies with 100 or less employees.  No expensive reporting requirements to IRS. Contribution limits are smaller than 401(k) but larger than IRA/Roth IRA.  Fees are generally paid on investments by participants.  0-3% participation employer match OR flat 2% for each employee regardless of participation.

Solo 401(k) – designed for sole proprietors with no employees.  Can only have two participants, owner and spouse (provided spouse is involved in business).  No expensive reporting requirements to IRS.  Fees are generally paid on investments by participants.  Same contribution limits as traditional 401(k).

SEP (Simple Employer Pension) – No expensive reporting requirements to IRS.  Fees are generally paid on investments by participants.  Same contribution limits as traditional 401(k).  Employer contributions only, and they are required to be paid in the same percentage of salary to each employee when paid.  However, the contributions are not required to be given every year.  So if the business has a down year you can skip that year, subject to frequency rules.

 

There are pros and cons to each plan of course, and there are even more options available. 

The point of this post is simply to show you that there are many more options than the traditional 401(k) out there and if you were previously in the camp that you think you’re too small to have your own plan, take a closer look!

  

This is meant for educational purposes only.  It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions. (05/20)