Setting Up a Retirement Plan for Your Small Business

When setting up a retirement plan for a small business, you have a number of options to choose from. Prior to recent legislative changes, small businesses could not compete with large corporations when offering retirement plans. Today, hyper-flexible IRA and 401(k) options allow small employers to offer great options to employees inexpensively. The problem is no longer whether to provide an option; it has become which option to use. Consider these factors in making your decision.


The first thing to consider is the paperwork involved with setting up a plan. Thankfully, the IRS has cut back on paperwork requirements with current plan options. Both SIMPLE 401(k) and SIMPLE IRA plans require only one form to set up. The same is true of SEP IRAs and other flexible IRA options. This is highly favorable over a traditional 401(k) that requires multiple sets of paperwork and notifications during the lifetime of the account.


How much do you want to spend on your plan? The cost of your retirement plan comes in two segments: the cost to maintain the plan and the cost to contribute on your employees’ behalves. Start with maintenance costs. Do you want to be the one to manage investments? Or would you rather give this responsibility to your employees? If you opt for the first, you will need a 401(k). In the second option, an IRA plan will work well. With the IRA plan, each employee sets up his or her own retirement account, and you can make direct contributions for the employee. The cost of contributions to your employees’ accounts will also vary based on the plan. For example, with an SEP IRA, you are solely responsible for entering savings into the plan. You must deposit the same amount for each of your employees, including yourself, which can make the plan expensive. With a SIMPLE IRA plan, however, your employees contribute their own funds. You can choose whether to match the funds or not, and you can give differing amounts to differing levels of employees.

Employee Demographics

Consider the types of employees that work for you. Are they your family members, part-time contractors or full-time staff members? Each retirement plan has specific eligibility rules for employees as well as employers. For example, the SEP IRA requires an employee earn at least $450 and work for three out of the past five years before eligibility. Other plans may give you the benefit of determining when an employee is eligible. For example, you may set eligibility to begin after one year or three months, and you may allow only full-time employees to be eligible for the plan. These options are up to you, but the responsibility to notify your employees of eligibility rules is also yours. Once you choose and establish your plan, you must inform all employees immediately of your elections, how and when they will qualify, and the options they have within your plan.

What is a leased employee?

A leased employee works for an agency outside of his or her place of work. On any given day, the employee reports to a company that has an agreement with the true employer. All paychecks, benefits and arrangements are made between the employee and the leasing company. If you are a small business owner, leased employees can save you large amounts of money. You can borrow the skills of an individual from a much larger company. That company provides benefits so you don't have to. Your employees can enjoy the rewards of working for a large employer while still coming to work in your small office.

Can I restrict the number of employees that have access to my small business 401k?

You can restrict access to your small business 401k, but you must do so under the regulations of the 401k plan you have elected. Some 401k plans must be extended to all full-time employees over the minimum qualified age. Others give an employer more flexibility to set standards, restricting the option to management alone or to employees who have been with the organization for a given length of time. When you are considering setting up a 401k, talk to your plan administrator about the cost of the plan. If you cannot afford to add all employees, assure you have chosen a plan that allows you to restrict benefits.

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