A Business Retirement Plan Guide

Ken Hargreaves, CFP®, AIF®, AWMA®, CRPC®
Having the right retirement plan for your business may seem like an easy task, and it might be. But most business owners aren’t aware that there are many different plans to choose from and design options that could be tailored to their company’s and family’s unique situation.
With these factors optimized, other pieces of the puzzle fall into place – you receive a powerful tool for attracting and retaining talent, enhanced employee satisfaction, and a culture of fiscal security, all coming together to set your business on a solid growth trajectory.
However, navigating the myriad of retirement plan options available can be daunting. Each plan – be it a SIMPLE IRA, a SEP-IRA, or various forms of 401(k) plans – comes with a unique set of features, benefits, and considerations. Understanding the nuances of these plans is crucial to making an informed decision that aligns with your business’s specific needs, goals, and employee demographics.
This article outlines the basic landscape of retirement plans for small to medium-sized businesses. In further papers, we will delve deeper into the details in a series designed to help you make the best decisions for your business.

Plan Comparisons

In this section, we will explore the specifics of various retirement plan options, focusing on their features, ideal business size, contribution limits, and the distinct advantages they offer to both employers and employees.
Features
SEP IRA
SIMPLE IRA
401(k)
Contribution limit (2024)
$69,000
$16,000 + 3% Match
$69,000 (combined)
Vesting Schedule
100% immediate
100% immediate
Varies depending on the plan
Administrative Burden
Low
Medium
Medium / High
Suitable For
Small businesses with few employees and limited resources
Medium-Sized Businesses that want to offer employee contributions and a matching program
Businesses of all sizes
Catch-up contributions
Businesses of all sizes
$3,500
Yes ($7,500 for ages 50+)
Loans
No
No
Yes
Roth Option
Yes
Yes
Yes

SEP-IRA

Key Points:
  • Easiest Plan to Establish and Maintain
  • Significant Tax Deductions
  • Increased Flexibility
  • Ideal for Very Small Businesses

The SEP IRA is quite different from a SIMPLE IRA or a 401(K), primarily because the sole contributor to employees’ retirements is you, the employer. In exchange, you receive potentially significant tax deductions, higher-than-average contribution limits, and zero nondiscrimination requirements. 

This arrangement allows for a high degree of simplicity and flexibility, as you can adjust your employer contributions – or eliminate them – based on your profits and tax needs. All you have to do is choose your contribution rate each year – no need to determine each employee’s contribution and your match or calculate vesting schedules. 

Since employees don’t have to fund their retirement, a SEP IRA provides a lucrative recruiting tool. However, the possibility of a reduced or eliminated employer contribution may also dissuade some.  

There are other caveats to be aware of – as we hinted above, all contributions are immediately 100% vested, meaning you can’t reclaim contributions made on behalf of an employee via early termination of employment. However, employees may see this as a sign of trust and loyalty. 

Additionally, contributions must be uniform for each employee to comply with nondiscrimination regulations, ensuring that all employee benefits are fair and equal. This means that the owner must contribute a uniform percentage of each employee’s salary. As the owner, if you decide to contribute 3% of your salary to the retirement plan, you must also contribute 3% of each employee’s salary. 

Finally, there are caps on how much you can contribute for each employee – in 2024, you can contribute up to $69,000 per employee or up to 25% of their salary, whichever is less.

SIMPLE IRA

Key Points:
  • Simple to Establish
  • Affordable to Maintain
  • Significant Tax Deductions
  • High Flexibility
  • Ideal for Companies < 100 Employees

If you’d rather not bear the sole responsibility of your employees’ retirement, you may consider a SIMPLE IRA (Savings Incentive Match Plan for Employees), as employee contributions are the norm, though again, not obligatory. Like a SEP IRA, a SIMPLE IRA is designed for simplicity and ease of use, though there are key differences. Unlike a SEP IRA, Top-heavy testing isn’t necessary, but there are no nondiscrimination testing requirements like a SEP IRA.  

It is particularly suited for small businesses with 100 or fewer employees who want to avoid the complexities and costs of a 401(K) plan. For 2024, employees can contribute up to $16,000, with an additional catch-up contribution of $3,000 for employees over 50. Employers can match employee contributions up to 3% or as low as 1% (permissible two out of every five years) of an employee’s compensation. Regulations state that employers must warn employees of any reduction in a company match. 

Alternatively, you can contribute a fixed 2% to all eligible employees. In either case, the match can be deducted. Opting for a 2% contribution can help ensure your retirement plan benefits all employees and simplify your expenses. You may consider this option if your employee participation rate is low and you’d like a more significant deduction. 

Easier to set up and maintain than a 401(K), a SIMPLE IRA is a valuable recruiting tool that incentivizes employees to contribute to their retirement. 

401(k) Plans

Key Points:
  • Recognized and Trusted
  • High Contribution Limits
  • Adaptable to Growth
  • Ideal for Established and Growing Businesses

Nearly every American has heard of the 401(k), which is, by this time, a staple of retirement. Unlike a SIMPLE IRA, you can have hundreds or thousands of employees participating in your company 401(k). Alternatively, if you have a small company of 50 employees, a 401(K) may still be the best fit for your financial goals and needs. 

The 401(k) particularly stands out in its flexibility and customization and comes with generous contribution limits. In 2024, employees can save up to $23,000, with those aged 50 and over eligible to make an additional catch-up contribution of $7,500. 

With its capacity to serve an expanding workforce, a 401(k) plan is particularly advantageous for established businesses seeking to offer a competitive benefits package. It can be customized with a range of features, such as company matches, Roth options, vesting periods, and early withdrawals under certain circumstances, making it adaptable to the specific needs of the employer and employee. 

401(k) Safe Harbor Plan
One issue employers often encounter is that other retirement plans do not suit their needs due to top-heavy and non-discrimination testing requirements. A Safe Harbor Plan also combines the benefits of nonelective contributions of a SIMPLE IRA, which significantly simplifies the administrative process, with the other aspects of a 401(k) that an employee finds valuable, such as Roth options and early withdrawals. 

On the other hand, potential challenges with Safe Harbor 401(k) plans include the requirement for immediate vesting of contributions and the obligation to maintain the plan for a full year. Additionally, these plans typically incur higher administrative costs and necessitate engaging a Third-Party Administrator (TPA) for tax filings and the creation of legal plan documents.

In Conclusion

Choosing the proper retirement plan is crucial for your business’s growth and your employees’ futures. Equally important is selecting the right provider that can keep costs as low as possible while growing your plan’s assets in a tax-efficient manner. Stay tuned for our next article, where we go into more detail about plan costs and how they affect your retirement readiness.
Whether it’s a SIMPLE IRA for smaller teams, a 401(k) for larger enterprises, or something in between, we can help you navigate your options to ensure you and your employees are retirement-ready.

Ready to secure a retirement-ready future for you and your team? Click the button below to start crafting your ideal retirement plan today.
Disclosures

Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio. All investment strategies have the potential for profit or loss. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author/presenter as of the date of publication and are subject to change and do not constitute personalized investment advice.

A professional advisor should be consulted before implementing any investment strategy. WealthGen Advisors does not represent, warranty, or imply that the services or methods of analysis employed by the Firm can or will predict future results, successfully identify market tops or bottoms, or insulate clients from losses due to market corrections or declines. Investments are subject to market risks and potential loss of principal invested, and all investment strategies likewise have the potential for profit or loss. Past performance is no guarantee of future results.

Please note: While we strive to provide accurate and helpful information, we are not Certified Public Accountants (CPAs). The information in this article is intended for informational and educational purposes only and should not be interpreted as tax advice. It is crucial to consult with a CPA or tax professional to discuss you

Author

  • Ken Hargreaves, CFP®, AIF®, AWMA®, CRPC®

    A Florida native, and full-time Sarasota resident, Ken founded WealthGen Advisors, LLC after spending more than fourteen years in the financial advisory industry. Ken holds multiple industry designations, as well as a master's degree in Financial Planning. Prior to founding WealthGen Advisors, Ken spent almost a decade in New York and then Texas as Vice President at The Capital Group, a $2T global investment manager serving institutional clients and pension funds.

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