What type of retirement plan should your small business offer?

August 27, 2014

Guest blogger Charlene Barkley shares tips on finding the right retirement plan to fit your small business, and employees, needs.

I recently shared my story about the launch of Brazzlebox.com, a business to-business social media network for small and home-based businesses, in the Hiscox Small Business Corner. In addition to being a platform for small business owners, we also focus on challenging and educating our members. One of the biggest questions that we get asked is, “How do I start a small business and when I do, what kind of retirement plan should I be offering?”

It’s no secret that the U.S. Social Security program is in danger. Employees are required to contribute 6.2% of income and employers match this 6.2%. If you are self-employed, this entire percentage is on your own shoulders at a rate of 12.4%. Benefits for Social Security are calculated off of your 35 highest earning years. These payments are adjusted for inflation, as the U.S. Social Security Administration deems fit. For those born after 1960, full retirement age is now 67 years-old. This means that those that are 30 years old today, will be able to collect benefits between the years of 2050-2051. However, recent studies are proving that the anticipation of the plan exhaustion is 2033. This means that our current workforce for the next 19 years needs to have alternative plans for retirement. At exhaustion benefits payments would be dramatically reduced to ¾ of what the promised payments are now. Without immediate action and an approximate contribution increase of 1.3% to employees and employers there will continue to be a problem and deficit and no restoration.

Unfortunately for small business owners and their employees, the Social Security program is unreliable as a form of retirement and they should be planning with other methods for their future. Data from the 2011 U.S. Census Bureau shows that there are over five million employers in the United States. Of that number, 99.7% were employers that employed 500 or less employees and employers with 20 employees or less were 89.8% of this figure.

A SIMPLE IRA (Savings Incentive Match for Employees) is a great savings plan for employers with less than 100 employees with a payroll of at least $5,000 or more per annum. This plan offers:

    • Easy and affordable setup (small businesses may even be able to write off this expense).
    • Affordable maintenance as there is no plan administrator, just a small costs from an investment advisor
    • Easy maintenance with higher limits (employees can contribute up to $12,000. Those that are 50 and older can add a catch up contributor of $2,500).

The SIMPLE IRA requires the employer to match 2% of the employee’s total compensation or 1-3% matching contribution of employee’s total pay. These matches are tax deductible for employers. These plans are, however, limited to small businesses. If your business may grow to over 100 employees, this wouldn’t be the right plan. These contributions will also count against a 401(k), so if you are running a business and contributing to an employer’s 401(k), this can limit your savings capabilities. They also come with a stiff 25% early withdrawal penalty and the same percentage will apply if you roll the account over in the first two years. The contributions by the employer are mandatory, no matter what type of year the business is having. Low contribution caps also make it difficult for save for a big-payout retirement.

The Individual 401(k), also known as the solo 401(k), allows small business owners to contribute as both the employer and employee. Their spouses can also participate, if employed as well. Your business can contribute 20% of your total earnings. These contributions aren’t set so, if business isn’t doing well, you can contribute less. The contributions can also be done as a business expense tax write-off. 401(k)’s are more complicated because they do require an administrator and the employer must pay for the fees of start-up and maintenance. Also, once the account reaches $250,000, you have to report the benefits. They do offer the contribution and match to reach a big retirement pay-out, but that can be more costly.

At Brazzlebox, we recommend that small business owners meet with a financial advisor and discuss and review all options to best fit their needs as well as their employee’s needs. Regardless of what retirement plan a small or home-based businesses chooses, we  firmly believe that they have an alternative to Social Security in place. As cost of living goes up, as well as our population, we have to plan for our future!

Charlene Barkley is the Director of Advertising and Promotions for Brazzlebox, a business-to-business social media network for small and home-based business. Her skills include business management, accounting, information technology, network administration and leadership. Connect with Charlene online at https://twitter.com/smallbizchar.