Are you a small business owner looking to offer retirement benefits to your employees? Finding the right retirement plan can seem overwhelming and complex, but it doesn't have to be that way. Our recent survey found that 68% of business owners don't have a retirement plan in place for themselves or their employees.
However, plenty of options are available for even the smallest businesses; all you need is the right guidance. We are partnering with Penelope, the retirement platform built for small businesses, so you can get the guidance and support you need when setting up a retirement plan for yourself and your employees.
In this guide, we'll cover everything necessary for small business owners to know about offering retirement plans in their company – from understanding different types of accounts, setting aside funds within your budget, and providing incentives for your team to participate.
This guide will help make finding the right solution easy and give you peace of mind knowing that you and your employees can look forward to financial security come retirement age!
What is a Retirement Plan?
In short, a retirement plan involves setting aside money regularly while working so that you can live comfortably when you retire. Establishing a retirement plan is one of the most important decisions you can make for yourself and your future.
Having a well-structured retirement plan can benefit your long-term financial health, allowing you to accumulate funds to help support you during your golden years. It's never too early to start thinking about putting together a good retirement plan, as even small contributions over time can make a big difference in the long run!
How Should you Plan for your Retirement?
When planning for your retirement in future years, it can be helpful to outline your expectations for the type of lifestyle you want to maintain, such as when and where you'd like to retire, how much money you'll need for everyday expenses, and how much money you would like for hobbies or traveling.
Steps to take to plan for your retirement:
- Think about at what age you'd like to retire
- Plan out where you'd like to retire so you can budget for your expenses
- Set a savings plan that will help you reach your desired retirement age and income needs
Setting aside time and resources now to plan out the future can save you considerable stress and effort later in life, allowing you to spend more time enjoying your retirement with family, friends, and activities that bring you joy. With a good retirement plan in place, retirees can look forward to living through their golden years comfortably and happily with the satisfaction of having prepared carefully over many years.
Can a Small Business Owner Set Up Their Own Retirement Plan?
Yes, it is possible as a small business owner to set up your retirement plan, and many small business owners are doing it! Whether your business entity is an LLC, sole proprietor, partnership, etc., you can create a retirement plan that best fits your goals and budgeting. Plus, regardless of your retirement plan, you may be able to take advantage of the tax benefits associated with contributing your savings to these plans.
Related Reading: Difference Between an LLC and a Sole Proprietorship
Penelope is the retirement platform created specifically for small business owners. With subscription-based plans for just $8 a month per active employee, they provide an affordable solution for business owners looking for a retirement platform option. Save an additional $875 when you sign up today.
Can a Small Business Owner Set Up a Retirement Plan for Their Employees?
Small business owners often assume that establishing and maintaining a retirement plan for their employees is too costly and time-consuming, but that isn't necessarily the case, especially with Penelope! Setting up a retirement plan for employees is a great way for business owners to show their dedication to their company's long-term success and further invest in their employees.
With Penelope, they will recommend the plan that best fits your business's needs. Additionally, they integrate with over 150+ payroll providers making the process quick and easy!
Why Should Small Business Owners Save for Retirement?
Whether you are a small business owner or not - everyone should plan to save for retirement! Setting aside money at an early age makes it easier to keep up with contributions, can help you benefit from compound interest growth, and provide you more comfortable retirement later in life. Additionally, preparing for the future helps relieve some of the stress associated with uncertain economic times.
While some small business owners may plan to sell their business in order to have funds for their retirement, it is always good to diversify your assets by setting up a retirement account.
Types of Retirement Plans for Small Businesses
When it comes to retirement planning for small business owners, there is no one-size-fits-all solution. The best retirement account for you depends on the needs of your business and its long-term goals.
Depending on your investment objectives, factors like the flexibility of withdrawals in the future, recurrent long-term gains, and differential rates of return should all be considered when choosing a retirement account that best serves your business interests.
1. Simplified Employee Pension (SEP) IRA
A SEP IRA is a retirement savings plan that is available to small business owners and self-employed individuals. Contributions to a SEP IRA are made by the employer and are tax-deductible. SEP IRAs have high contribution limits and can be a good option for business owners who want to maximize their retirement savings. Under the SEP IRA rules, you can contribute up to 25% of your eligible compensation each year, up to a maximum of $66,000 in 2023. You can also make catch-up contributions if you're over 50.
2. Simple IRA
A Simple IRA is a retirement savings plan that is available to small business owners and self-employed individuals. The employer and the employees can make contributions to a Simple IRA. Simple IRAs have relatively low contribution limits but offer some tax advantages over other types of retirement plans. For 2023 you can contribute $15,500 to your Simple IRA.
3. Solo 401(k)
A Solo 401(k) is a retirement savings plan that is available to self-employed individuals who do not have any employees. Contributions to a Solo 401(k) can be made by both the employer and the employees. Solo 401(k)s have high contribution limits and offer some tax advantages over other types of retirement plans. You can contribute up to $22,500 in 2023.
Interested in setting up a Solo 401(k)? Get started with Penelope and save up to $875!
4. Traditional Individual Retirement Account (IRA)
A traditional IRA is a retirement plan that allows small business owners to set aside money for their retirement on a tax-deferred basis. IRAs have relatively low contribution limits but offer some tax advantages over other types of retirement plans. You can contribute $6,500 if you're under age 50 or $7,500 if you're age 50 or older for 2023.
5. Roth IRA
Roth IRA contributions are made on an after-tax basis; this means you are placing money into your Roth IRA account that has already been taxed. Roth IRAs have relatively low contribution limits but can be a good option for those who want tax-free income in retirement. You can contribute $6,500 if you're under age 50 or $7,500 if you're age 50 or older for 2023.
6. Traditional 401(k)
A Traditional 401(k) plan is a small business retirement plan that allows employees to contribute a portion of their paycheck to a tax-deferred account. Traditional 401(k)s offer several advantages to participants, such as tax-deferred growth of investments, employer matching, and contribution limits. Additionally, contributions made towards a Traditional 401(k) are deducted directly from your paycheck pre-tax, allowing you to maximize the amount of money you can invest for retirement each year. In 2023 you can contribute $22,500 to your 401(k).
7. Pooled Employer 401(k) Plan
A Pooled Employer Plan (PEP) is a retirement plan designed specifically for small business owners. Under the rules of a PEP, businesses can pool their resources to provide retirement benefits for their employees. This can be a great way for small businesses to offer retirement benefits without having to bear the full cost themselves. You can contribute up to $22,500 in 2023.
Fundid Recommendation: Start saving for your future with Penelope! The Penelope team is on a mission to enable every small business owner and employee to build a bright financial future. They understand small businesses and will recommend the plan that best fits your business needs, whether that's a Pooled Employer Plan (PEP), traditional 401(k), or a Solo 401(k). Save up to $875 when you get started today.
Are Small Businesses Required to Offer a Retirement Plan to Their Employees?
The answer to whether small businesses are required to offer a retirement plan to their employees is complicated, as it depends on various factors, including the total number of employees and state laws. Many states have begun to mandate that employers offer employees a retirement option.
What are State-Mandated Retirement Plans?
New laws are being passed in certain states that require businesses to offer their employees a retirement plan. In order to be compliant with these laws, businesses either need to enroll their employees into the state-sponsored retirement program or offer a retirement plan to their employees through a provider of their choice.
Why are States Mandating that Businesses Offer Retirement Plans?
A recent study by AARP found that 57 million Americans do not have the option to save for retirement at work and that more Americans would save for retirement if they had a retirement option through their employer. Because of the high percentage of Americans who don't have access to an account for retirement through their workplace, states are mandating that businesses offer retirement plans to their employees to provide them with a path to financial security in retirement.
What States Have Required Retirement Plans?
Many states have implemented state-sponsored retirement plans - business owners should check with their local representatives for the latest updates for their state.
The CalSavers Program is a Roth IRA, meaning that employees who enroll in the program use after-tax monies to contribute to their selected investments.
Businesses in California with an average of five or more employees must enroll in the CalSavers Program or offer their employees an alternative retirement plan option. Employers may be subject to fines if they are not compliant.
Connecticut has established a state-mandated retirement program known as My CT Savings. Connecticut employers with five or more employees in Connecticut — at least five of whom have been paid more than $5,000 in the calendar year — are required by law to join MyCTSavings if they don’t offer a retirement plan for their employees.
Colorado’s state-mandated retirement program is known as the Colorado Secure Savings Program.
For employers with 50 or more employees, the deadline to comply with the law is March 15, 2023. For employers with 15 to 49 employees, the deadline to comply with the law is May 15, 2023. For employers with 5 to 14 employees, the deadline to comply with the law is June 30, 2023.
Illinois Secure Choice is the Illinois state-mandated retirement plan. As in other states, employers who do not already have another retirement plan available, who have more than five workers in Illinois, and who have been in business for at least two years are required to offer the program.
The Maine Retirement Savings Program was signed in 2021, and the following deadlines from the passed bill are outlined below:
- April 1, 2023: a covered employer with 25 or more covered employees
- Oct. 1, 2023: a covered employer with 15 to 24 covered employees
- April 1, 2024: a covered employer with 5 to 14 covered employees
The Maryland Saves program is the state-mandated retirement plan offered. Under Maryland law, businesses that have been in operation for at least two calendar years, have at least one W-2 employee, and use an automated payroll system must provide their employees with a retirement option or enroll in the Maryland Saves program.
New Jersey has created the Secure Choice Savings Program, which is intended to help employees save for their retirement. While the New Jersey Secure Choice Act was signed in 2019, the program still needs to be implemented.
Once it comes into effect, the state will require non- and for-profit employers who have been in business for at least two years and have 25 employees to enroll.
New Mexico plans to implement the Work & Save program, which will provide employers access to a retirement savings plan for their workers. The state plans to develop and implement its plan by July 1, 2024.
The New York state-mandated retirement plan is known as New York State Secure Choice Savings Program. It requires all employers who have employed at least 10 New York employees during the previous calendar year and have been in business for at least two years to offer the plan.
The plan became active at the end of 2021 but has yet to be operational.
Oregon has established the OregonSaves Program. All employers are eligible to participate in the program, regardless of the company’s number of employees or how long it has been in business.
If you’re a business with three or more employees, you are required to sign up by March 1, 2023. If your business has 1-2 employees, your registration deadline is July 31, 2023
The Green Mountain Secure Retirement Plan is entirely voluntary for employers with 50 or fewer employees. Once implemented, it will be categorized as a multiple-employer plan.
In 2021, Virginia passed a bill establishing an IRA savings program known as RetirePath. Certain Virginia employers that don’t offer a qualified retirement savings plan are required by state law to facilitate the RetirePath program when it opens in 2023.
State-Sponsored Retirement Plans vs. Employer-Sponsored Retirement Plans
State-sponsored retirement plans are relatively easy for an employer to participate in. While it may vary from state to state, most state plans are free to employers and require only that they enroll the company in the program and handle the administrative aspects of contributions.
With state-sponsored retirement plans, most times, employers cannot contribute to their employee's retirement accounts. You should also check what your state qualifies as an "eligible" employee. Many states will require that employees are at least 18 years old, working 30+ hours a week, and receiving a certain amount of wages. Employees can choose how much to contribute to their retirement account, and they can also choose to opt out of the plan.
Employer-sponsored retirement plans function similarly to state-sponsored plans, except that there is usually a cost associated with the retirement program. However, there are business tax benefits, such as deductions for matching contributions and credits for the fees associated with the program. Additionally, most state-sponsored retirement plans are either Roth IRA plans or Traditional IRA plans, which have lower contribution limits than other retirement plans like 401(k)s.
Related Reading: How State-Mandated Retirement Plans are Changing the Landscape
Why Should a Small Business Offer Retirement Plans to Their Employees?
Small business owners have an excellent opportunity to promote financial security among their employees by establishing retirement plans. Retirement plans are a perfect way to keep staff satisfied, attract and retain quality workers, and motivate them toward greater performance. Offering your employees retirement savings benefits also has potential tax incentives that could add up to substantial contributions toward future business financial goals.
Setting up retirement plans for your employees as a small business owner can help build trust between employer and employee since it conveys the message that you are committed to the long-term success of your team. Ultimately, including retirement plans can help create a path for economic stability for many years to come for the organization and its dedicated employees.
Five Reasons Small Businesses Should Offer Retirement Plans to Their Employees
1. Tax Benefits
One of the primary reasons why small businesses should offer retirement plans to their employees is that they can receive tax benefits. For example, small businesses that set up 401(k) plans can deduct contributions per year from their taxes.
2. Attract and Retain Employees
Another reason small businesses should offer retirement plans to their employees is that it can help attract and retain them. Many workers are looking for employers offering retirement benefits, such as 401(k) plans or health insurance. Small businesses can make themselves more attractive to potential employees by providing these benefits.
3. Improve Morale and Productivity
Offering retirement benefits can also improve morale and productivity among employees. Workers who feel their employer is invested in their future are more likely to be motivated and productive. Additionally, happy and engaged employees are less likely to leave their jobs, which can save a small business money in the long run.
4. Reduce Turnover
Another benefit of offering retirement benefits is that it can help to reduce turnover. When employees leave their jobs, it costs a small business money in terms of lost productivity and the cost of training new employees. By offering retirement benefits, small businesses can encourage their employees to stay with the company for the long term.
5. Build Goodwill
Finally, offering retirement benefits is a good way for small businesses to build goodwill with their employees. When employees feel like they are being treated well by their employer, they are more likely to have positive feelings toward the company. This goodwill can lead to improved morale and productivity and reduced turnover.
How can a Small Business Offer Employees a 401(k) or Other Retirement Options?
As a small business owner, you might be worried about cost or other logistics -- but there's no need to panic! Simple and affordable options, like Penelope, allow you to tailor to your business and employees' needs. Online-based retirement plans, like Penelope, are usually the most cost-effective and efficient option since they don't require much paperwork or administration on your end.
Retirement platforms that connect to your payroll are an added bonus as they make contributing to their retirement accounts an automated process; encourage your employees to contribute towards their financial future regularly. Penelope is the leading small business retirement platform. Not only do they integrate with over 150 payroll providers, but they also work with you to determine the best retirement plan for your small business.
Start Saving for Your Future With Penelope's Support
It’s never too early to start saving for retirement and, as a small business owner, you can give your employees the tools they need to save by offering a retirement plan. Penelope makes it easy to get started with retirement plans for your small business. They'll handle all the heavy lifting so you can focus on what you do best: running your business. Ready to get started? Contact Penelope today.