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

As a small business owner, you understand the importance of providing your team with incentives that will help them stay engaged and motivated. One key benefit that can have a tremendous impact on your employee's financial freedom, is retirement savings.

However, small business owners often have a difficult time finding affordable 401k plans for their business and their team. Fortunately, there are now 401k plans that are specifically tailored for smaller businesses. In this guide, we'll explore how to provide secure retirement benefits even if you don't have the resources of larger corporations.

Overview of 401k Retirement Plans

A 401k plan is a retirement savings plan that allows employees to contribute a portion of their paycheck into a tax-advantaged account. The contributions are invested in a variety of funds, such as mutual funds or stocks, depending on the employee’s choice and risk tolerance. Employers can also match a percentage of the employee’s contributions, making it an even more attractive benefit.

Not only does a 401k plan benefit your employees, but it also has tax advantages for your business. By setting up a plan and contributing to it yourself, you can lower your taxable income and potentially save on taxes. So, if you're looking for a way to provide long-term financial security for your employees and yourself, consider offering a 401k plan.

Related Content: Listen to Navigating 401k Plans for Small Businesses on the Fundid Podcast, with guest Jean Smart, to uncover the ins and outs of offering employees 401k plans and the recent Secure 2.0 federal act that aims to motivate small businesses to set up such plans.

Benefits of Offering a 401k Plan for Small Businesses 

A 401k plan benefits both employers and employees. For employers, offering a 401k plan can attract and retain employees by providing a valuable benefit that is essential in today's job market. It can also reduce the taxes paid by the business owner and keep more cash flow in the business.

For employees, a 401k plan offers an easy way to save for retirement with automatic contributions and the possibility of employer-matching contributions. These accounts allow employees to make contributions pre-tax, and their investment continues to grow tax-free until withdrawn. This provides employees an opportunity to lower their taxable income as well, saving money for their present and future selves.

Related Reading: A Small Business Owner's Guide to Retirement Plans

Considerations When Setting Up a 401k Plan 

There are several things to consider when setting up a 401k plan to ensure you meet all the necessary requirements and regulations. First and foremost, you'll need to choose a plan provider and determine what type of plan fits best for your business. You will also need to think about contribution limits, investment options, and vesting schedules.

Employer Matching 

While it is not required to offer an employer-matched contribution, most do as an extra incentive for employees to utilize the offering. If you are interested in this, we recommend weighing the importance of providing a competitive benefits package against the financial implications this will have on your business. Common contribution options often follow a format similar to the two below.

• Company will match 100% of the first 3% of the employee's contribution
• Company will match 100% of the first 3% of the employee's contribution and another 50% up to 3% employee's contribution

Vesting Period

A vesting schedule determines how much of the contributions made to the plan by both you and your employees become fully owned by the employee after a certain period of time. When determining the vesting schedule for your employees, it is crucial to think about the duration that employees will be staying with your company, as well as the level of contribution matching you're planning to offer.

Some businesses will use the vesting schedule as an incentive to remain with the company for an extended period of time. This can lead to higher retention rates, lower turnover, and save you money by not having to train new employees. On the other hand, immediate vesting schedules are an attractive offering to bring in high-quality candidates that place high value in ownership of these contributions. With careful consideration and thoughtful planning, you can create a vesting schedule that aligns with your business goals and helps your employees achieve their financial objectives.

Options for Low-Cost Retirement Solutions for Small Businesses 

As a small business owner, you may be looking for ways to maximize your retirement contributions while reducing your taxable income. Fortunately, you have options when it comes to choosing the right retirement plan for you and your employees. Although there are several low-cost retirement solutions available, the Simplified Employee Pension (SEP) plan, the Savings Incentive Match Plan for Employees (SIMPLE) IRA, or the Solo 401k plan, if you have no employees, are the most common plans.

Simplified Employee Pension (SEP)

A Simplified Employee Pension (SEP) is a retirement plan that allows employers to contribute to their employees' retirement savings without the administrative complexity of traditional plans. This plan allows you to save up to 25% of their compensation, up to a maximum of $66,000 for 2023. The contributions are tax-deductible for the employer and can grow tax-deferred for the employee until retirement.

With a SEP plan, you can help your employees reach their retirement goals while also attracting and retaining top talent. Plus, the process of setting up and maintaining a SEP plan is straightforward and won't require excessive time and resources. Overall, a SEP plan can be a valuable asset for any small business looking to provide retirement benefits to its employees.

SIMPLE IRA

The SIMPLE IRA is designed for businesses with 100 or fewer employees. This plan allows you and your team to contribute pre-tax dollars to the plan each year with a variety of investment options to choose from. Employees can contribute up to $15,500 in 2023, and employers can match up to 3%. One of the best things about a Simple IRA plan is that it's easy to set up and maintain - making it an excellent option for any small business owner looking to provide a retirement savings benefit to their employees.

Solo 401(k)

If you are self-employed or have a small business with no employees, a solo 401k plan may be the best fit for you! With a solo 401k plan, you have the ability to contribute both as the employer and the employee, potentially allowing for higher contribution limits and greater flexibility in your retirement savings. Additionally, a solo 401k plan can offer investment options beyond traditional retirement accounts, such as the ability to invest in real estate or privately-held companies. As you navigate the world of retirement planning, a solo 401k plan is definitely worth considering as a viable option for saving for your future.

As you navigate the world of retirement planning, these plans, including a simplified setup process, flexible contribution limits, and generally no annual IRS fillings, are definitely worth considering as a viable option for saving for your future.

Fundid's Recommendation: Penelope created digital 401(k) plans designed specifically to fit your business needs, from pricing to investments to administration. Save up to $875 with our discount offer, and start planning for your financial future today!

How to Administer a 401k Plan for Your Employees 

Administering a 401k plan for your employees takes time and effort, but it's helpful to ensure its success and doesn't have to be complicated. First, you'll need to set up the plan with a qualified financial advisor or 401k provider. When researching providers, consider their fees, investment options, and customer service. Once you've chosen a provider, communicate the plan and its benefits to your employees through clear and concise materials.

Finally, regularly review the plan and make adjustments as needed. If you selected a plan with required IRS filing obligations, be sure to set aside time each fiscal year to complete this. By providing a 401k plan, you're investing in the long-term financial health of your employees and your business. You need to track employee eligibility, withhold contributions from paychecks, and ensure timely deposits of contributions. You also need to file annual IRS reports and provide plan information to your employees regularly.

Tips to Help Your Employees Make the Most of Their Retirement Savings

Your employees' retirement savings success depends on their knowledge and involvement in the plan. As an employer, there are a few key things you can do to help encourage your team to maximize the benefits of their 401k. First and foremost, make sure to educate your team on all aspects of the plan, including vesting periods, contributions, tax savings, and any match offerings.

Next, try to minimize the complexity of the enrollment process so it is not intimidating. One easy way to do this is by offering automatic enrollment when someone is first hired. Lastly, promote open communication on this topic. It may be beneficial to add 401k as a standing agenda item to any 1:1 meetings so your employees have a chance to ask questions if needed. This can be an opportunity to motivate your employees to save for their financial future and remind them to take advantage of the employer-match contributions if applicable.

Get Started with Penelope, the Retirement Platform for Small Businesses

If you're nervous about how to pick a plan provider, look no further. Penelope prides itself on being ridiculously easy and insanely affordable. They are currently waiving the first-time set-up fee and monthly subscription cost for 3 months! This means you could start a 401(k) plan with subscription-based pricing for just $8 per active employee per month. To simplify things even further, Penelope has pre-designed plans with Vanguard funds and can sync with over 150+ payroll providers.