At the end of 2019, President Trump signed into law the Setting Every Community Up for Retirement Enhancement (SECURE) Act to expand current workers’ access to tax-advantaged retirement accounts and to help prevent older Americans from outliving their retirement savings. (1)
Additionally, several states and cities have already passed legislation that requires private-sector employers to join a state-controlled retirement program if they don’t already sponsor a retirement plan for their employees. (2) Many other states are considering joining those who have already passed such legislation.
With compliance deadlines quickly approaching for small businesses in California, we want to help both California employers and employers in states considering retirement plan legislation prepare for these new changes. If your business doesn’t comply with retirement plan legislation by the time deadlines roll around, you could be on the hook for some hefty fines.
Benefits Of Retirement Plans For Employers
Although no one likes to be told how to run their business, the good news is that you have lots of options when it comes to choosing a retirement plan that’s in the best interest of your business (see below!). Plus, there are significant benefits for employers who offer their employees a retirement plan.
Businesses that offer retirement plans to employees are more likely to attract and retain talented people. When your employees can easily make contributions to their retirement directly from their paycheck, they worry less about their future. Employees who aren’t stressed about their finances are likely to be more productive, more creative, and more excited to perform well at their job.
When you go the extra mile and make contributions to your employees’ retirement accounts, you’re showing them you value their lives outside of the workplace. And because your bottom line is important, you should know that employer contributions are tax-deductible. You can significantly lower your tax burden by helping your employees plan for a more secure future.
Benefits Of Retirement Plans For Employees
The benefits for employees are perhaps obvious, but by offering a tax-advantaged retirement plan, you can also help employees reduce their tax burden while saving more for their future. Their contributions and investment gains will not be taxed until they begin taking distributions, and they can easily make contributions through the payroll system. This makes it more likely that employees will contribute more to their retirement without feeling like they’re losing income.
Although employees will be able to move their retirement savings with them to a new job, your contributions make it less likely that they’ll want to leave your company. You can also protect yourself by instituting a vesting schedule with some retirement plans so you’re only contributing to employees’ retirement who have shown loyalty to your business.
What Retirement Plan Should You Choose?
Although a state-sponsored plan may very well be a good fit for your business, you have plenty of other options and it can pay to shop around. Luckily, there are low-cost and low-maintenance plan options beyond a 401(k). These other options are specifically designed to benefit your employees with little effort, cost, and involvement on your part. Some of your other options include a SIMPLE IRA or a SEP-IRA.
For many businesses, the 401(k) may be the best option. 401(k) plans are available to any private employer and are attractive because they offer high contribution limits for both employees and employers. Compared to the IRA options, 401(k) plans may be more costly to set up and maintain, but they also provide more flexibility in employer contributions than some other plans.
SIMPLE IRA plans are best suited for businesses with 100 employees or less. Employers who offer a SIMPLE IRA may not have any other retirement plans and are required to contribute a portion of each employee’s salary each year. SIMPLE IRA plans are easy to set up and often cost little to maintain each year.
SEP-IRA plans are also low-cost and easy to set up and maintain. SEP plans allow high contribution limits—up to 25% of a participant’s annual earnings. SEP plans have more flexible employer contributions than SIMPLE IRAs, which may be good for businesses with fluctuating cash flow. However, employers must contribute equally to all eligible employees.
1on1 Financial Can Help You Choose The Right Plan For Your Business
When you’re setting up a retirement plan for yourself and your employees, you have a lot to consider. Different retirement plans may work better for you based on the size of your business, your anticipated cash flow, and the level of involvement you want to have in the plan’s administration. To see how we can help you navigate these new waters, call our office today at 909-981-1720 or simply click here to schedule a free 15-minute introductory phone call!
About 1on1 Financial
1on1 Financial is an independent financial advisory firm specializing in guiding working and retired professionals, executives, and business owners along the path to financial well-being. Founded in 1997, we use a team approach to help our clients accumulate wealth, generate income, preserve their life savings, and strategically plan for the distribution of their estate. With more than 50 years of combined experience in the financial services industry, we remain true to our fundamental mission: to provide personalized guidance, treatment, care, and service so our clients can gain control of their future and feel confident in their financial life.