Retirement Plan FAQs for Small Business Owners

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Does your small business offer a retirement plan to employees? If the answer is ‘no,’ you may be curious about the specifics of securing one, such as:

1. Why Should I Set One Up?
2. What Should I Consider?
3. What Costs Are Associated with Opening a Retirement Plan?
4. What Are My Choices?
5. What if I’m Short on Time to Plan?

This guide answers some of these common questions so you can make the best decision for your small business and the people working for you. It’s important to brush up on this topic so you can avoid costly mistakes.

Why should I set one up?

1. Retaining and attracting employees

Is retention an issue at your business? When you lose an employee, productivity can slow or screech to a halt. When you hire a new employee, you will need to spend time training the person and giving them time to ramp up to the responsibilities of their position.

While improving retention is based on a lot of different factors, the benefits your business offers holds a lot of weight in the equation and can even attract better talent to positions you’re trying to fill.

In today’s world, a retirement plan is expected. If it’s a choice between an employer with a retirement plan and one without, a qualified candidate is likely to go elsewhere. All of this can hurt your bottom line.

2. Rewarding loyal employees

If your employees have been loyal to the company for many years, you may feel a paternal instinct to help them start planning for retirement. This way, you can begin looking after them like the ‘family’ you consider them to be.

3. Professional advice

Your CPA or tax advisor may have suggested setting up a retirement plan so you can defer some of your business profits, not pay taxes on it, and fund a retirement plan for you and your employees.

What should I consider?

Employee make up

There is no minimum number of employees to set up a retirement plan, so even a business with a three-person team can pursue one. You should look at the makeup of your staff to determine the right plan for your business, including who is considered an ‘employee.’

People who work for the business part-time, full-time, or on a seasonal basis are all considered employees. If they get a W-2 during tax time, they are an employee. If they get a 1099, they are an independent contractor and should not be factored into your decision when choosing a plan.

But what if you have family members working for you? By law, your spouse, children, and parents – even if they don’t own stock or a portion of the company – are considered owners of the business by family attribution.

Goals

The final thing to consider is how much you want to save. Knowing the dollar amount you want to save can influence what plan is more appropriate for your needs and goals. If your goal is a high dollar amount, pay attention to the limits associated with each plan option.

It may be best to avoid a more expensive or complicated plan if you’re not going to maximize the benefits of it. In this case, a more simplistic option may be ideal.

What costs are associated with opening a retirement plan?

To make an informed decision, you must first familiarize yourself with the costs associated with retirement plans to see if one can realistically fit within your budget:

• Start-up implementation fee.
• Annual administration, asset-based, and per-participant fees.
• Employer matching or non-elective contribution cost.
  • In some circumstances, you may be required to make contributions to save any meaningful amount within the plan itself.
• Investment expenses or revenue sharing.
  • This could include mutual funds, exchange-traded funds, group annuities, etc.
• Financial professional (commission or asset-based advisory fees).
• Payroll integration.
• Independent plan audit.
  • The IRS requires this for plans covering more than 100 employees.

What are the most common varieties?

Before we jump into some of your choices, there are a few key terms you should know about:

• The standard contribution limit is the total amount you are allowed to contribute to a retirement account in a calendar year.
• Catch up contributions are retirement savings contributions available to people who are age 50 or older at the end of the calendar year.
• An employee deferral refers to pre-tax dollars removed from your paycheck and put into a retirement account.
• Mandatory employer contribution is what the employer pays into a retirement plan.

Simple IRAs

A Simple IRA plan is designed for employers with less than 100 employees. Most employees will meet eligibility requirements and the maximum employee deferral is $13,500. Catch up contributions in 2021 for those age 50 and up is $3,000.

The plan includes a mandatory employer contribution of either 2% of an employee’s salary or match dollar-for-dollar, up to 3% of an employee’s salary. Ask your CPA or tax advisor about tax-deductible contributions.

You’ll enjoy no IRS or U.S. Department of Labor reporting and no compliance testing (employer contributions negate the need for compliance); and plan documentation is typically free. There is also little to no administrative cost or expense. With proper notice, the plan may be turned on or off on an annual basis.

401(k)

401(k)s are attractive if you want higher contribution limits or you have more than 100 employees.

Employees can set aside a portion of their income on a tax-deferred basis and invest it in a qualified retirement account. The 2021 contribution limit is $19,500. People age 50 and up can make a catch up contribution of up to $6,500.

As an employer, you can add profit sharing to a 401(k) plan. Doing so may come with tax advantages, so be sure to discuss this option with a CPA or tax advisor.

• Tip: These are the most popular retirement plans available. To learn about other types, such as profit-sharing, watch our on-demand webinar Retirement Plans for Small Businesses.

What if I’m short on time to plan?

Outsource it and let a professional handle it! There are dedicated resources available to you.

These professionals can offer enrollment support, increase plan participation, provide needed education on retirement readiness, and help you reach more successful outcomes.

Learn more about retirement plans by watching our on-demand webinar Retirement Planning for Small Businesses. You’ll gain more information about different types of retirement accounts and how the Setting Every Community Up for Retirement Enhancement (SECURE) Act comes into play.

GECU offers a full suite of business products and services, including business checking, credit cards, and merchant processing. Additionally, GECU members have access to Investment Services, which small business owners can entrust to find an excellent retirement plan for their employees.

Learn more about membership and eligibility; or, if you’re already a member, contact Todd Blessing with Investment Services* at 513.243.4328 x173 or [email protected] or Erik Waldron with Investment Services at 513.243.4328 x305 or [email protected].