Are Small Businesses Required to Offer Retirement Plans?

As a small business owner, you may wonder if you must offer your employees a retirement plan. The answer is: it depends. Several factors come into play when determining whether or not your small business is required to offer a retirement plan, such as the state you do business in, the number of employees you have, and the type of business you operate. In this guide, we will explore different requirement plans and suggestions so you can make an informed decision for your business and employees.

In general, small businesses are not required to offer retirement plans. However, it is important to remember that the landscape around retirement laws and regulations is always changing. For example, some states, like those below, have initiated their own retirement mandates for business owners.

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State-Specific Mandates to Be Aware Of

The first state mandate that small business owners should be aware of is the Automatic IRA mandate. This mandate requires businesses with more than five employees to offer an IRA to their employees. This requirement is applicable in ten states – including California, Connecticut, Illinois, Maryland, Oregon, and Washington - with more states set to join the mandate.

These state-mandated retirement accounts are IRAs and are designed to make it easier for employees to save for retirement. Through automatic deductions from an employee's paycheck, it makes it a more convenient way to contribute to a retirement plan. However, employees can opt out of the retirement plan if they want to.

Related Reading: How to Offer Retirement Plans for Businesses With 10 or Less Employees

Because of these mandates, there are state-sponsored retirement plans businesses can offer their employees. These plans are designed for businesses that don't have another retirement plan in place and are typically low-cost and easy to administer. State-sponsored plans are available in California, Connecticut, Illinois, Maryland, Massachusetts, New Jersey, New York, Oregon, Vermont, and Washington.

There are some exceptions to these mandates that small business owners should be aware of. Businesses that exist for less than two years are exempt in some states. Also, some employers may have a lower headcount requirement in certain instances. It's essential to check with your state and local government to ensure compliance with these mandates.

How a Retirement Plan Benefits Your Employees

As a small business owner, your employees are the backbone of your company’s success, so providing them with what they need to succeed, both at and away from work, is important. Your team's future is worth investing in, and offering benefits is one great way to show appreciation for their hard work and commitment to their well-being.

Retirement plans are one of the most impactful benefits you can offer your employees. A good retirement plan puts your employees in control of their financial future. This can bring a sense of autonomy, financial security, and certainty about their growth within your business. The fear of not having enough money to retire may weigh heavily on employees' minds. Small business owners can help ease this burden for their employees by offering a retirement plan. Additionally, these contributions often lower their taxable income and help with additional cost savings during tax season.

How Offering a Retirement Plan Benefits Your Small Business

As retirement benefits are becoming increasingly important to today's workforce, you may feel overwhelmed by the pressure and cost to implement this offering into your benefits package. Don't let this deter you because there are low-cost options available. For example, some states offer simple and cost-effective retirement plans for businesses.

Moreover, many providers offer affordable and customizable retirement savings options, such as 401(k) plans or individual retirement accounts (IRAs). Small businesses can also contact their local small business administration or chamber of commerce to learn about options that best fit their needs. Still not convinced? Continue reading to learn how offering your team a retirement package will benefit your business.

1. Attract and Retain Talented Employees

Offering a retirement plan can help attract and retain quality employees. High-caliber employees are typically attracted to companies that offer competitive benefits packages. A retirement plan is a valuable benefit that can set your company apart from the competition. It can also help retain existing employees who may be considering leaving for a company with a better benefits package.

2. Tax Benefits

The employer's Retirement plan contributions are typically tax-deductible expenses and will save your business money. In addition, offering a retirement plan to your employees will provide a way for you to save for your own retirement and lower your taxable income.

3. Employee Loyalty

When employers provide a retirement plan, it shows employees that they value them and are investing in their future. This can strengthen employee loyalty and create a sense of security and investment in their work. Loyal employees are more likely to grow with your company, which will reduce turnover and training costs.

4. Improved Workforce Productivity

When employees have a job and a career mapped out with the company, they tend to be more motivated and engaged, driving productivity levels up. A retirement plan can facilitate this process by providing a sense of workforce stability and long-term financial planning. Reduced stress levels can provide a more positive and conducive work environment, which can positively impact the organization's bottom line.

While you are likely not required to offer your employees a retirement plan, there are advantages to doing so. If you are interested in adding this benefit but don't know where to start, check out Penelope. They are on a mission to help small business owners navigate the complexities of retirement savings and feel secure in their financial future!

Types of Retirement Plans You Can Offer Your Employees

  1. Traditional 401(k) Plan: This is the most common type of retirement plan. Employees can make pre-tax contributions directly from their wages, and employers can choose to match a portion of those contributions. The money grows tax-deferred until withdrawal.
  2. Roth 401(k) Plan: Similar to a traditional 401(k), but contributions are made after-tax. This means qualified distributions in retirement are tax-free. It's particularly beneficial for younger employees who are currently in a lower tax bracket but expect to be in a higher one at retirement.
  3. Simplified Employee Pension (SEP-IRA): Ideal for small businesses and self-employed individuals. Contributions are tax-deductible, and the business makes all contributions.
  4. Savings Incentive Match Plan for Employees (SIMPLE IRA): Designed for small businesses with 100 or fewer employees. Both employees and employers can contribute.

The choice between these plans depends on factors such as the cost to administer them, how many employees you have, and how much you want to contribute each year.

Setting up and implementing these plans typically involves working with a financial institution or retirement plan administrator. They can guide you through the setup process, help with paperwork, manage the plan's investments, and ensure compliance with relevant regulations.

Related Reading: The Full Guide to Retirement Plans for Small Business Owners

How Penelope Helps Small Businesses Offer Retirement Plans

Penelope is a retirement platform built for small business owners. With transparent pricing and affordable plans, they are making it attainable for all business owners to save for their futures. With pre-designed retirement plans with Vanguard funds for best-in-class performance, getting started has never been easier. 

Start your Solo 401(k) for as low as $8 a month with Penelope!