The Retirement Plan Small Businesses Should Offer

Small business owners or other self-employed individuals face challenges in providing benefits that larger corporations do not. One of those difficulties lies in offering a retirement plan for their employees. Employer-sponsored retirement plans are critical for reducing taxes and attracting and retaining quality employees.

In fact, only 71% of small companies (10-99 employees) offer a retirement plan, compared to 95% of larger companies. And often the plans that are offered have fewer features available. One of the reasons for this disparity is that qualified retirement plans can be full of details and fees that don't make it worthwhile for a small business to offer this benefit to their employees. Is there another option that will provide the same benefits so your employees can invest in their future? (For related reading, see: 8 Reasons Why Valued Employees Quit.)

What Is a SIMPLE IRA?

SIMPLE IRA stands for savings incentive match plan for employees. It offers the benefits of both a traditional IRA and a 401(k) but is created specifically for small businesses. It allows employees and employers to contribute to traditional IRAs and is designed for businesses with less than 100 employees that do not subscribe to another retirement plan. So how can a SIMPLE IRA benefit your business?

Simplified Administration

Qualified retirement plans, such as 401(k)s, are not only complicated to administer but also involve a myriad of start-up and maintenance costs. SIMPLE IRAs offer low administrative costs and employers are not required to file annual financial reports with the government. If you choose a financial institution to administer your plan, they will handle most of the details for you and any expenses that do occur can be used as a business write-off. (For related reading, see: SIMPLE IRAs: Introduction.)

Limited Financial Responsibility

To go along with the simplified administration of a SIMPLE plan, the employer has less financial responsibility than they would with a 401(k). Each plan participant controls their own risk level and asset distribution. Employees also have more control over how much and when to contribute.

Contribution Options

While employees may elect to be part of the plan, employers are required to contribute to their employee’s accounts each year. There are two options when distributing payment to their employees. They can either match up to 3% of the employee’s contribution or pay a flat 2% to employees who made at least $5,000 in the fiscal year, regardless of how much or if the employee contributed. SIMPLE IRAs also have higher contribution limits than traditional and Roth IRAs ($12,500 for 2016) and employees over 50 have the option of adding catch-up amounts of up to $3,000. Employees are also automatically vested in their account. (For related reading, see: SIMPLE IRA Contribution Limits in 2016.)

Tax Benefits

Just like a qualified retirement plan, contributions to SIMPLE IRAs are tax deductible and investments grow tax-deferred until retirement. This plan allows employers a tax deduction for contributions they make to their employees’ plans. Employers may be eligible for a tax credit of up to $500 per year for each of the first three years of subscribing to a SIMPLE IRA plan for their employees.

Have you been thinking about offering a retirement plan to your employees? If so, the deadline to start a SIMPLE IRA is October 1. (For more from this author, see: 4 Options for Your Old 401(k) When You Change Jobs.)