By Lee Rozeboom, Wealth Management Group Account Specialist
5/13/2024
Today’s small business owners seem to be facing more challenges than ever before. Owners are tasked with the challenge of making ends meet while facing high interest rates, record inflation, and a shrinking labor force. One resource that may be able to assist your small business to gain an edge on competing businesses may be an employer-sponsored retirement plan.
What is an Employer-Sponsored Retirement Plan?
First, let’s define what an employer-sponsored retirement plan is. An employer-sponsored retirement plan, such as a 401(k), provides employees the opportunity to save for their retirement in a hands-free and automatic way. Employees who participate will be able to save for their retirement automatically, all while benefiting from tax breaks. Employees who participate are also able to benefit from an employer match. An employer match is when the employer contributes money to the employee’s retirement account to reflect the contributions the employee added to their account. Employer matches can come in many different shapes and sizes. Some of the options include a dollar-for-dollar match or partial match, and profit sharing is another option.
Below is a chart which provides information about some of the most popular employer sponsored retirement plans:
Small Business Retirement Plans
| 401(k) | SEP IRA | SIMPLE IRA | |
| Best For | You're looking to offer your employees all the tax, savings, and retirement benefits. | You’re looking to provide retirement benefits for all employees by making solely employer contributions. | You’re looking for a great starter plan that encourages employees to contribute themselves. |
| Eligible Businesses | Any non-governmental employer | Any Employer | No more than 100 employees and employer does not maintain another retirement plan |
| Eligible Employees | All eligible employees | Anyone | Business owners with 100 or fewer employees |
| Pre-Tax Employee Contributions | Yes | Generally, no | Yes |
| Roth Contributions | Yes | No | No |
| Employer Contributions | Flexible - Up to 25% compensation | Flexible - Up to 25% compensation | 100% match up to 3% for mandatory contributions OR a 2% contribution for eligible employees |
| Catch-up Contributions (Ages 50+) | $7,500 | Generally, no | $3,500 |
| Contributions Limit for Participants | $23,000 | $69,000 | $16,000 |
| Distributions | Withdrawals before age 59 ½ may be subject to a 10% penalty | Withdrawals before age 59 ½ may be subject to a 10% penalty | 10% penalty on withdrawals before age 59 ½ and 25% penalty if taken within first 2 years |
5 Ways an Employer-Sponsored Retirement Plan Can Help Your Small Business Thrive
We have identified five ways an employer-sponsored retirement plan can help your small business thrive.
As an employer competing for the top talent in the labor force pool, an employer-sponsored retirement plan may be the edge you need to set you apart from your competition.
An employer-sponsored retirement plan helps encourage employee retention. The employer match is essential and could be the difference in acquiring and retaining top talent at your company. Employee benefits are becoming an even larger part of the decision-making process of choosing a workplace and career.
Many employer plans have the ability for profit sharing with employees. Under the discretion of the employer, companies can elect to distribute some of the profits to their employees via their employer-sponsored retirement plan.
As an employer providing a retirement plan, this shows you are committed to investing in your employee’s future as well as their retirement. This plays a key role in retaining top talent.
The 401(k)-match benefit is often pivotal in an employee’s decision-making process when choosing a job or career. A higher employer match is often associated with employee retention.
Eligible employers may be able to claim a tax credit of up to $5,000, for three years, for the ordinary and necessary costs of starting a SEP, SIMPLE IRA, or qualified plan (like a 401(k) plan.) A tax credit reduces the amount of taxes you may owe.
You are eligible to claim this credit if you meet the following criteria:
- You had 100 or fewer employees who received at least $5,000 in compensation from you for the preceding year;
- You had at least one plan participant who was a non-highly compensated employee (NHCE); and
- In the three tax years before the first year, you’re eligible for the credit, your employees weren’t substantially the same employees who received contributions or accrued benefits in another plan sponsored by you, a member of a controlled group that includes you, or a predecessor of either.
This is the necessary criteria provided by the IRS. The IRS is also aware of the importance of an employer-sponsored retirement plan. They are also willing to provide financial breaks to you as the sponsor.
Many employers elect to provide a match benefit for employees that contribute to the company retirement plan. It is not required, but any contributions the employer makes on behalf of the employees are tax deductible. By making these contributions employers will effectively be lowering their taxable income. This is a win-win for both employers and employees.
As an employer providing a retirement plan, you are assisting your employees to also lower their taxable income. Employees that contribute to a retirement account in a Pre-Tax manner will effectively lower the amount of taxes they owe. The money contributed to their account, will be deposited directly into the retirement account. Since the funds are paid directly to the retirement account, from the employer, the employee is never paid this money. This effectively lowers their earnings. By lowering their earnings, the employee does not need to pay income taxes on these funds.
Matching contributions made by the employer are tax-deductible and can be deducted from a company’s federal tax returns each year. These tax savings can help offset both the cost of offering a retirement plan and the matching contributions made by the employer.
A great benefit of an employer sponsored retirement plan is the funds in this account can grow on a tax deferred or tax-free basis.
- Tax Deferred: You postpone paying taxes on your contributions until a later time. The funds are taken directly from your employer and placed into your retirement account. You typically pay the taxes when you withdraw the funds from the account in retirement. This lowers your taxable income.
- Tax Free: This requires after-tax dollars, meaning you have already paid income tax on these funds. After you have paid income tax on these funds, you are able to allow your investments to grow without any taxation ever, even in retirement.
Each retirement plan is created differently, and some plans allow for both of these growth strategies and some plans only allow for one.
The employer also benefits from the retirement plan. They will receive the match, just as if they were another employee. The plan will assist the employer to save for their own individual retirement. As a business owner it is difficult to find spare funds to set aside for retirement. This is an automatic contribution to their retirement. The funds deposited into the retirement account are difficult to access prior to reaching retirement age. This provides a large incentive for participants to not access or tamper with these funds.
As a business owner you will have a large retirement nest egg saved up for when you decide to no longer run the business operations or pass it on to the next generation. This will create more options for you as you decide to exit the business. You will not be required to sell the business to enjoy your retirement.
How can Peoples Bank Wealth Management Group help?
Peoples Bank Wealth Management Group is an established provider of many employers sponsored retirement plans. We also provide expertise in the establishment of new plans as well as the continued management of previously established plans. Contact us to see how we can help your business provide a employer-sponsored retirement plan.
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