Your business may be relatively new, but if things are going well and/or if you want to retain good people, you may be considering offering some sort of benefits. The first place that new business owners often look is for professional development training; employees feel valued when their employer invests in their future. However, offering some form of retirement savings plan may be a viable option. It’s far less expensive and complicated than offering an Employee Stock Ownership Program or health benefits (you’re not legally required to offer health insurance until you grow to over 50 employees).
The U.S. Department of Labor has a handy .pdf guide and chart available here: https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/publications/small-business-retirement-solutions-information-booklet-2023.pdf
Easy options include a company-organized IRA, which requires no company match; the employer just handles the employees’ contributions via payroll deductions. If the employer wishes to make contributions, then a SEP or Simplified Employee Pension allows for sizeable maximum contributions of up to 25% of wages. Many employers choose a third option, Simplified IRA plans which require a 1% to 3% match of employees’ compensation.
Defined contribution plans include profit sharing plans, again paid solely by the employer, or various forms of 401(k) plans, which usually entail the employee making contributions and the employer matching them.
Defined benefit plans are at the other end of the complexity spectrum from IRAs. Think: “old school” pension plans. It’s doubtful that a newer business would be in a position to undertake that commitment, and most industries are moving away from this model. Thus, most small businesses offer IRA-based plans or Defined Contribution plans.
These plans can be less expensive that an across-the-board wage increase and can aid in employee satisfaction and retention. They may also provide some tax savings for both the owners and the employees, especially welcome at this time of year. Because most of these plans use contributions that are pre-tax, an owner or employee could save $5,000 for retirement (for example) and it would only feel like $3,500. If an employee had access to a magical machine that would turn $3,500 into $5,000 (and typically many times that, given time and the power of good investments), they would crank that machine all day. Business owners can provide that very machine, offering tax savings and a nest egg for the employees’ Golden Years, at very little expense.
