Setting up a small business is no easy feat, and you might feel like you have done all the hard work by the time your business is up and running. However, the reality is that the work never stops. This is particularly true once you start hiring employees. Employees need to be cared for in a number of different ways.
Even before considering how to keep your employees happy and mentally healthy, you need to ensure that they are given a structure in which to plan for their futures. There are few things more important to take care of than retirement plans.
While big businesses traditionally offer a 401(k) to all employees, small businesses have often dropped the ball in the past. This has not always been their fault, as options were few and far between. However, with modern retirement plans like a Roth IRA available nowadays, there is no excuse not to provide for this in their employment package.
Understanding the different types of retirement plans for small businesses is not always easy. To help you get started on making a choice, here are the different types of retirement plans you can offer your employees.
Roth IRA
Let’s start with the Roth IRA (Individual Retirement Account). The Roth IRA is an increasingly popular option for business owners and their employees alike. Typical retirement plans offered by big businesses deduct a portion of the individual’s salary before taxes. This allows for a bigger monthly payout, but means your retirement funds are taxed when you eventually withdraw them.
The Roth IRA works differently. Contributions come from your taxed salary that you then pay into your retirement account. This gives the individual more control over their IRA, as they no longer rely on their employer to deduct from their salary every month.
Roth IRAs are also more flexible, in that you can withdraw funds before retirement age. You can also open a Roth IRA regardless of on what basis you are employed (full-time, part-time, contract, etc).
Simplified Employee Pension Plans (SEP-IRA)
Simplified Employee Pension Plans (SEP-IRAs) are similar to the traditional 401(k) plans provided by bigger companies. The employer makes the contributions every month – contributions which are taken before taxes. Every employee must be given the same level of contribution, and they can’t exceed 25% of the employee’s net income (or $61,000 a year).
The benefits of a SEP-IRA include the fact that employees don’t have to deal with paperwork or even understand all the complications. Furthermore, a SEP-IRA comes with far lower operational costs than typical 401(k)s, with no setup or maintenance fees.
Savings Incentive Match Plan For Employees (SIMPLE) IRA
Savings Incentive Match Plan for Employees (SIMPLE) IRAs are similar to SEP-IRAs. The main difference is that employers must match the contributions given by the employees. The limits on contributions are however significantly lower than with a SEP-IRA plan.
SIMPLE IRAs have fewer guidelines than most other plans and are easy to set up. They benefit employers by providing secure retirement planning for staff. It is an excellent way of taking responsibility for the employees on your roster.
401(k)
As a small business, you can still offer traditional 401(k) plans to your employees. While these cost more to administer, there are some benefits. Eligible companies can sometimes claim plan startup tax credits to cover the startup costs of 401(k) plans. You could also qualify for deductions if you offer an employee match.
Similar to a SIMPLE IRA, you can offer a SIMPLE 401(k) to your employees. As with a SIMPLE IRA, you match your employees’ contributions. Unlike with SIMPLE IRAs, however, employees can take out loans against their SIMPLE 401(k)s.
Which Retirement Plan Should I Choose?
These are the most popular types of retirement plans chosen by small businesses for their employees. They each offer different benefits, and each has its drawbacks. Which retirement plan should you choose?
There is no simple answer to this question. Your decision will be based on a number of factors, including how much you are paying your employees, how many employees you have on your books, what kind of business you run, and your employees’ own preferences.
If you have a small, dedicated staff, you may want to speak with them about which retirement plans best suit employees. They may not know all that much about retirement plans and may be happy to leave the choice to you. However, some may know exactly what they want and will appreciate that you have given them the opportunity to provide input.
Every employer should consider offering retirement plans to their staff, no matter how small the business. While it is possible for employees to take their retirement planning into their own hands, it is in your best interests to ensure that their needs are taken care of.