Small Business Retirement Plans
Small business owners have several options when it comes to retirement plans. SEP IRAs, SIMPLE IRAs, 401(k)s, Solo 401(k)s, and other plan designs can all be good choices—but the right plan depends heavily on the business and what the owner is trying to accomplish.
Rather than starting with the name of a retirement plan, I like to start with three questions.
1. How Many Employees Do You Have?
The first question is simply: Who works for the business?
A business owner with no employees has very different options than an owner with 5, 20, or 50 employees.
For a self-employed individual or owner-only business, a Solo 401(k) or SEP IRA may provide a relatively simple way to save significant amounts for retirement.
Once employees are involved, the conversation changes. Eligibility requirements, employer contributions, administrative costs, testing requirements, and employee participation all need to be considered.
The number of employees—and how long they have worked for the business—is often the first step in narrowing down the choices.
2. How Much Does Everyone Want to Contribute?
Next, we need to know how much the owner and employees actually want to save.
Some business owners simply want an easy way for themselves and their employees to put a few thousand dollars away each year. Others may want to maximize their own retirement contributions and potentially contribute tens of thousands of dollars annually.
Those goals can lead to very different plan designs.
For example, a SIMPLE IRA can be an attractive option for a business looking for relatively straightforward administration and employee salary deferrals. A 401(k) can provide significantly more flexibility and potentially higher contribution opportunities. For owners looking to save even more, profit-sharing or cash balance plan designs may also be worth considering.
The best retirement plan isn't necessarily the one with the highest contribution limit. It is the one that provides the contribution flexibility the business actually intends to use.
3. Who Do You Want to Participate?
This is sometimes the most important question.
Who is the business owner trying to benefit with the retirement plan?
Some owners want to provide the same retirement benefit to everyone. Others may want to maximize contributions for themselves or key employees while still providing a meaningful benefit to the rest of the staff.
Employee ages, compensation, hours worked, length of service, and ownership structure can all affect which strategies make sense.
Different retirement plans also have different rules governing who must be eligible and how employer contributions are allocated. This is why it is important to understand the workforce before choosing a plan based solely on contribution limits or administrative costs.
Start With the Goal, Not the Plan
There isn't one retirement plan that is best for every small business.
When evaluating the options, start with three questions:
- How many employees do you have?
- How much does everyone want to contribute?
- Who do you want to participate and benefit from the plan?
Once those questions are answered, it becomes much easier to compare the available options and determine whether a SEP IRA, SIMPLE IRA, 401(k), Solo 401(k), or a more advanced retirement plan design deserves a closer look.
A well-designed retirement plan can do more than help an owner save for retirement. It can also help attract and retain employees, provide valuable tax-planning opportunities, and become an important part of the owner's overall financial plan.
If you're a business owner considering starting a retirement plan—or wondering whether your existing plan is still the right fit—a review of these three areas is a good place to start.