Cheap Retirement Plan Options – Small Business Trends

Small businesses need to offer employees a retirement savings plan to stay competitive in today’s tight job market. The federal government estimates that only a little over half (53%) of companies with fewer than 100 employees have a retirement plan for their employees. Still, it’s entirely possible to find a plan that won’t cost your budget. Here are some ways to make a retirement plan affordable for you and beneficial for your staff.


Small businesses with 100 or fewer employees who received at least $5,000 in compensation last year have set up a SIMPLE IRA plan. You can easily do this by signing an IRS form:

Form 5304-SIMPLE, which allows participants to select their own financial institutions to receive their contributions, or Form 5305-SIMPLE, which requires participants’ contributions to be initially deposited with the financial institution chosen by the employer.

Under a SIMPLE IRA, employees can choose to pay pay cut contributions up to annually set limits instead of receiving these amounts as part of their regular pay. For 2022, the salary reduction contribution limit is $14,000, plus another $3,000 for an employee age 50 or older by the end of the year.

In addition, the employer contributes matching or non-choice contributions:

Matching contribution. This is a required match of each employee’s salary reduction contribution(s) on a dollar-for-dollar basis up to 3% of the employee’s wages. (Only benefits up to a set limit — $305,000 in 2022 — are considered.) These contribution options require an employer’s contribution only if employees have chosen to make contributions. Non-elective contribution. If you do not make an appropriate contribution, you must make a non-elective contribution, which is 2% of compensation on behalf of any eligible employee who has at least $5,000 (or lesser amount selected by the employer) in compensation from the company for the year. Non-election contributions must be paid if there are no appropriate contributions, regardless of whether or not the employee opts for a pay cut contribution.

There is a 60-day notice – no later than November 2 for a plan that runs on a calendar year – during which an employer notifies employees of their eligibility to participate, the annual employee contribution limit, and the employer’s chosen contribution formula; employees then have until the beginning of the year to decide on their contributions. The notice to employees must also contain a brief description of the financial institution if the employer so chooses, as well as the fact that the employee can transfer his or her balance to his or her own financial institution at no cost or penalty.

State-mandated retirement plans

If you don’t have a qualified retirement plan, you may be subject to a mandate in your state. This means withholding employee contributions from their paychecks and then depositing them into a state-run plan. There are no employer contributions. The costs for the employer are the administrative burden of withholding and depositing the employee contributions. No employer contributions are allowed. Find details about which states have or are considering such mandatory plans from ADP. Links to the state plans, with details on withholding, are provided by ADP.

Wage deduction IRA

With this option, an employer does not have a formal retirement plan. The employer only ensures that all employees pay their own contributions to IRAs. The maximum they can contribute is the usual annual IRA cap (e.g., $6,000 in 2022, plus another $1,000 if they are 50 or older by the end of the year). Again, the cost to an employer is the administrative cost of withholding the contributions and transferring them to the employees’ accounts.

Pooled Employer Plans

Employer groups and associations can set up 401(k) Pooled Employer Plans (PEPs) in which individual companies can participate. This type of plan allows for greater contributions to employee pay than is allowed for SIMPLE IRAs, while reducing administrative costs for employers and shifting much of the fiduciary burden (and risk) to a professional administrator called a Pooled Plan. Called provider. Two or more companies can come together to form a PEP, but it is primarily for trade associations and other companies to form one. For example, Paychex has a PEP option.

tax credits

If you set up a retirement plan, you may qualify for one or two federal tax credits for your efforts. This obviously reduces the cost of having a plan.

last thought

If you want to invest more in employee retirement savings by setting up your own plan, there are many options, including 401(k) plans, SEPs, and defined benefit plans. Learn more about these options from an IRS card for this purpose and from the Department of Labor.

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