Sponsoring a retirement plan for employees is a big step for a small business. Here are four considerations that can help you determine whether offering a retirement plan is a good strategy for your business.
1. It helps you attract and retain talent.
As the country enjoys low unemployment rates and skilled workers are in high demand, offering a retirement plan as part of your benefits package helps you compete against larger companies to attract and keep top talent. In fact, companies that don’t offer retirement plans are shrinking in number. A 2023 Callan survey on retirement plan trends reported that 81 percent of respondents now offer a 401(k) plan.
2. It gives you tax advantages.
If you haven’t offered a retirement plan before and have fewer than 100 employees, you may be eligible for the Retirement Plans Startup Costs Tax Credit. For the first three years of your plan, you’re credited up to 50% of plan startup and administration costs, up to $500 per year. If you match your employees’ contributions, your contributions are tax-deductible. You may also be able to lower your personal income tax bracket by participating in the plan. You should consult your certified public accountant (CPA) or tax advisor about the tax implications for your business as well as your personal finances.
Upcoming federal legislation may offer additional tax credits to small businesses that automatically enroll their employees in a retirement plan. It may ease other regulations as well, making it easier for small business owners to offer this benefit to their employees.
3. It helps you save for your own retirement.
You’re allowed to participate in the plan you sponsor, and you’ll be able to save more money for retirement than if you set up a traditional or Roth IRA. Many small business owners choose the safe harbor 401(k) because it allows them to max out their own retirement contributions when they match or contribute to employee accounts. Again, you should ask your CPA or financial advisor how you can maximize your retirement savings under the plan you select for your business.
4. Your state may require it.
Some states have passed, or are in the process of passing, legislation that requires businesses to either provide retirement plans for their employees or register with the state and allow their employees to participate in a state-sponsored plan. Employers choosing the latter would be required to submit employee payroll contributions to the state, but as of this writing, they wouldn’t be required (or allowed) to contribute to employee plans. They would, however, face penalties for noncompliance. They also wouldn’t receive the tax credits for sponsoring a plan of their own.
California, Illinois and Oregon have already begun implementing such legislation in phases, starting with larger businesses. Small businesses will also be subject to this legislation. As of June 2022, California now requires businesses with five or more employees to enroll in CalSavers, a state-sponsored retirement savings program. In this case, employers don’t pay fees and have minimal responsibility. However, failure to allow employees to participate can result in a fine of up to $750 per employee.
Connecticut, Maryland and Massachusetts have passed legislation to form state-run plans. New Jersey and Washington plan to offer online marketplaces where small business owners can shop for retirement plans for their businesses.