Employer Retirement Plans Made Easy

A lot has changed since the recession hit, but businesses that want to attract top talent should offer high-quality retirement plan options as part of their benefits package.

That means small businesses, too. Otherwise, competing with corporate America for talented professionals becomes harder than it needs to be.

To be sure, providing such a benefit can be a hassle for the small-business owner. “A lot of companies aren’t putting both feet in the water to open new retirement accounts because it can be extremely challenging to maintain these plans,” says Vincent Crescenzo, a registered financial consultant with Brooks, Jucha & Associates, an employee benefits specialist for small companies. “For the average small-business owner, the 401(k) is their biggest headache,” he says.

Still, employees expect such a benefit. Retirement experts estimate that Americans will need to save 70 to 90 percent of their preretirement income to maintain their standard of living when they stop working. And by providing a retirement plan at your business, not only will you be helping your employees save for retirement, but any contributions you make on their behalf will be tax-deductible from your income.

Deciding on the type of plan you offer depends on the type of business you own, the number of workers you employ and the composition of your labor force. For example, do you mostly have factory workers or highly compensated employees? (A highly compensated employee, or HSE, is anyone who owns 5 percent or more of the company or earns more than $110,000 a year.)

“Most business owners go directly to offering a 401(k) because that is the standard solution,” says Dan Maul, a registered investment advisor who specializes in creating small-business retirement plans. “There are all sorts of Internal Revenue Service regulations that require companies to prove that their 401(k) plans do not discriminate against lower-paid employees and that everyone is treated in an equitable fashion,” says Maul.

To that end, it may be prudent to start with an individual retirement account (IRA). “An IRA offers some advantages that a 401(k) doesn’t,” says Maul. To figure out which plan is right for you, here is a brief primer on retirement plan options based on current IRS rules and requirements. For more information, start with the Department of Labor’s Employee Benefits Security Administration Web site and Publication 560 from the IRS. Options are divided into IRA-based plans, defined contribution plans and defined benefit plans. I’ll go over IRA-based plans here and explain defined contribution plans and defined benefit plans in another column.

Individual Retirement Account (IRA). People tend to think of an IRA as something that individuals establish on their own, but an employer can also help employees create and fund IRAs. An employer arranges for the employees to make payroll deduction contributions and then transmits them to the IRA.

Employees can decide how much to contribute, though there is a maximum annual contribution rate of $5,000. This option may be best for employees who aren’t expected to contribute more than $5,000 a year to a retirement plan. Part of that contribution can be in the form of an employer bonus.

“This is the simplest and easiest plan to create because there are no administrative costs or discrimination tests,” says Maul.

Simplified Employee Pension Plan (SEP-IRA). This plan is a low-cost, low-maintenance option for a small company that has only a sole proprietor (no employees) or just a handful of employees (you use IRS Form 5305-SEP to set up the plan, but there’s no annual IRS filing requirement for the employer). The employer funds the plan with tax-deductible contributions. Employee contributions are prohibited. The good news is that if your company is going through a tough time, you’re not required to make contributions.

On the other hand, you must include all qualified employees (individuals who have worked for you for the three of the last five years and earned at least $550 in the previous year). Also, there is a contribution limit of 25 percent of your adjusted gross income (gross-income expenses) up to $49,000 and you must contribute the same salary percentage for each employee that you contribute to your own account.  Say, for example, you earn $100,000 as the business owner and you want to contribute $25,000 to your own account. “At some point, you don’t want to give your employees the same percentage of pay for everyone who is eligible,” says Maul.

Savings Incentive Match Plan for Employees (SIMPLE IRA). This is also a low-cost, low-maintenance option in that the employer only has to fill out a form to get started and has no annual IRS filing requirements (use IRS Form 5304-SIMPLE or 5305-SIMPLE). Companies that have fewer than 100 employees and no other retirement plan qualify. 

These plans are the most attractive of the IRA-based plans for employees because they allow employee contributions and mandate an employer match. An employee who has earned more than $5,000 in any two years and earns at least that amount in the current year can contribute up to $11,500 a year to the plan ($14,000 for those 50 or older). The employer is required to make a dollar-for-dollar match of up to 3 percent of an employee’s salary or a contribution of up to 2 percent of salary regardless of an employee’s contribution.

The downside is that you’re not likely to contribute as much as you would into your own retirement account than you would with a SEP. But you might be able to create a profit-sharing plan that could increase your own contributions. Financial services firms like Charles Schwab and mutual fund companies like Fidelity, T.Rowe Price  and Vanguard offer hundreds of easy, convenient and low-cost investment opportunities for IRA accounts.  

Toddi is an award-winning journalist, writer and editor and currently is a contributing writer covering career management issues for The Wall Street Journal.