Retirement Planning 101 for Your Business

Employee Benefits
Article
6 min. Read
Last Updated: 01/05/2023

Table of Contents

Benefits of Offering Retirement Plans to your Employees

Retirement plans for employees are beneficial for business owners as well. Eligible small businesses can get a tax credit equal to 100 percent of the cost to set up and administer the plan. (The credit maximum is $5,000 per year for each of the first three years of the plan).

Offering a key benefit like retirement plans can help employers attract new workers and reduce turnover. Employees who make an investment in their future through retirement plans may be less likely to move on to other companies — especially when employers make enrollment easy and add value to an employee's total compensation. To do so you can:

Use automatic enrollment
Match your employees' contributions
Incorporate profit sharing

Tax Benefits of Setting Up Retirement Plans for Employees

Employers, employees, and self-employed individuals can reap tax savings from contributing to a qualified retirement plan. This can be accomplished through:

Deductible contributions. Employers participating in qualified retirement plans can deduct contributions, thus reducing their taxable income.

SECURE¹ Act Tax credits. Eligible employers starting new plans are entitled to a tax credit of up to $5,000 over three years. Combine that with the $500 tax credit for automatic plan enrollment for three years, and employers could save up to $16,500.

SECURE Act 2.0 credits. The employer contribution credit is available to eligible employees. The credit is generally a percentage of the amount contributed by the employer, up to $1,000 per employee. It is limited to employers with 50 or fewer employees and reduced for employers with between 51 and 100 employees.

Less employer income subject to employment taxes. There are no Social Security or Medicare (FICA) taxes on employer contributions. This includes employer-matching and non-elective contributions to employees' 401(k) and SIMPLE IRA accounts. However, employees' salary reduction contributions, while exempt from income tax withholding, are subject to FICA taxes on both the employee and employer.

Next steps: How to Set Up a Retirement Plan for Employees

What's the best way to explore and implement retirement plans for employees? The keys are to do your homework, work with experts in the field, and commit to educating your workforce about the plan you've chosen.

1. Research your options

Do your due diligence in researching firms that provide recordkeeping and third-party administration services for 401(k) plans. Include a range of established mutual fund companies, brokerage firms, and insurance companies with excellent reputations. Focus on companies that can serve you and your employees in the long term with extensive resources and excellent customer service. In some cases, your payroll company or benefits provider can administer retirement services.

When choosing a retirement plan, it's important to understand the costs associated with setting one up, arranging for employee contributions, and handling ongoing administration. With planning, you can simplify your retirement plan administration and limit your liability. Furthermore, you may want to:

Design a plan that helps you fulfill administrative obligations. For example, safe harbor plans, which require a mandatory employer contribution, will pass 401(k) plan testing when plan requirements are met.
Simplify the enrollment process with automatic plan features. Automatic enrollment, for instance, adds participants to the plan upon eligibility, and participants can opt out of participation if they choose.
Delegate certain plan functions. You may not have the time or expertise to manage some aspects of the plan yourself, such as selecting and monitoring investments.

2. Set up a retirement plan

Once you have chosen a knowledgeable financial advisor, they can evaluate your options and help you decide which makes the most sense for your situation. An experienced provider of retirement services can answer any questions you might have and help you every step of the way, including ongoing support.

3. Communicate the benefits to employees

With a high-quality retirement plan in place, the next step is a major commitment to marketing this benefit wherever your recruitment efforts take place. You may want to:

Prepare written and online materials outlining the key features and advantages of the plan and provide materials to interested applicants at job fairs and other hiring events, as well as during individual job interviews.
Create a special "save for your future" page on your careers website with all the relevant facts and statistics you can provide for a broader picture, and include an easy-to-read FAQs page that allows job candidates, employees, and other site visitors to quickly research the plan.
Provide examples of the long-term financial benefits of saving through a 401(k). The money that goes into a 401(k) plan is taken from a participant's paycheck before taxes. Doing so effectively lowers take-home pay, which in turn decreases the taxes paid. It's important to note that while the money put into a 401(k) can accrue for years, withdrawals are taxed when they are taken out during retirement. Let employees calculate their individual savings by using a retirement calculator.
Encourage employees to spread the word about this great retirement plan throughout their personal and professional social media networks.

Learn more on how to set up a retirement plan for your company and boost employee participation.

A refresher course in retirement planning may not be a primary focus for business owners who are dealing with day-to-day operations. Nevertheless, it can be a very strong component of your employee benefits package — and a strong recruitment tool for new hires. Neither your business nor your employees can afford to neglect retirement planning, so it's critical to emphasize the importance of retirement benefits to employees.

It's also important to consider the types of retirement plan options to choose from, how to get started, and the maintenance options available.

Common types of retirement plans for your business

Several retirement plan options are available to business owners, but the following five types are the ones commonly chosen:

401(k) plan. In this plan, participants can elect to contribute a portion of their paycheck into selected investment options. Taxes on the money in a 401(k) aren't levied until the money is withdrawn from the account. As the employer, you may make contributions to an employee's account and choose a vesting period, a defined amount of time that employees must work at the company to have the full benefit of the contribution available to them.
PEP 401(k). The Pooled Employer 401(k) Plan (PEP) is a relatively new type of retirement plan that enables smaller businesses to consider a 401(k) plan by reducing the burdens of administration and fiduciary responsibility. Administered by a Pooled Plan Provider, this lower-risk, easy-to-manage plan allows employers who don’t share common interests (such as a trade group) to pool their assets into a single 401(k). In addition to being simpler, the PEP can help achieve economies of scale to make the plan more affordable.
SIMPLE IRA. Another retirement option is the Savings Incentive Match Plan for Employees (SIMPLE) Individual Retirement Account. This option is appropriate for small businesses with 100 or fewer employees who earn $5,000 or more on payroll. Setup and maintenance are easy with a SIMPLE IRA, and the required contribution you give your employees is tax-deductible as a business expense. This option also offers higher contribution limits than a traditional or Roth IRA.
SEP IRA. With a Simplified Employee Pension, also known as a SEP IRA, setup and maintenance are easy as well. As an employer, you pay 100 percent of the contributions (employee contributions are not allowed), and the money is immediately vested for the employee. Your contributions are tax-deductible as a business expense. Note: With a SEP IRA, all eligible employees must be included in the plan, and contribution percentages must be the same across the board.
PROFIT SHARING. Profit-sharing plans are another way that employers can help employees save money for retirement. Qualified participants receive a contribution to the plan, typically calculated based on a percentage of their compensation. To create a profit-sharing plan, a written plan must outline the features and procedures of the program.

Common Concerns and Myths about Retirement Plans

Both business owners and employees can have false impressions or wariness about retirement plans. Some commonly held misconceptions:

My employees aren't interested or can't afford to contribute. Paychex recently partnered with Harris Interactive to run a survey detailing the level of employee interest in 401(k) plans. Forty percent of workers stated that they would leave their company for another company offering a 401(k). It's important to educate your employees about compound interest. At a 3 percent interest rate, adding $100 a month to a 401(k) plan can yield more than $50,000 in savings in 30 years. Understanding the advantages of a 401(k) plan may help encourage employees to contribute.
All retirement plans are the same. Generally speaking, 401(k) plans are similar to some degree simply because they all function as retirement savings plans. But there are certain nuances between plans and the choices plan administrators have. For example, some employers provide matching contributions, while others don't provide any form of employer contribution at all.
Business owners don't benefit from it. Small business owners benefit from their contributions in terms of tax deductions. And with a 401(k) plan, they can become eligible for small business funding from banks and other financial institutions.
Retirement plans are too expensive. Under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, the IRS offers a small business retirement plan tax credit for business owners with fewer than 100 employees who create a 401(k) program for their employees. This tax credit is up to $5,000 a year over three years and an auto-enrollment credit of $500 a year over three years, for a total tax credit of up to $16,500. It is a direct effort from the U.S. government to make starting a 401(k) plan affordable for small businesses. Under SECURE Act 2.0, which passed in late December 2022, additional credits are available, including the employer contribution credit. This credit is generally a percentage of the amount contributed by the employer, up to $1,000 per employee. It is limited to employers with 50 or fewer employees and reduced for employers with between 51 and 100 employees.
Businesses need to prioritize debt over savings. Adding savings to your portfolio can have some unexpected benefits to fund your business. Although 401(k) plans are designed for retirement savings and can grow faster if the funds are left untouched, the owner-only 401(k) includes a provision allowing you to borrow from your account if you need quick access to funds. Most business owners would agree that borrowing from yourself, as opposed to a creditor, is more comfortable.
Adequate plans aren’t offered to small businesses. Some business owners aren't aware that an owner-only 401(k) is an option. There are products available to support small business owners so they can maximize their savings for retirement.
It's too hard or complicated to implement. This may be true if a small business owner chooses to take on this responsibility alone, but many financial firms offer recordkeeping and third-party administration services for 401(k) plans. Some providers offer low-cost, flat-fee packages (with affordable management fees) specifically tailored to businesses with 50 or fewer employees.