4 Types of Retirement Plans for Your Business
By Samuel P. Irvine, CFP®, CRPC®, Financial Consultant & Investment Advisor
In today’s competitive job market, offering a compelling 401(k) plan is often a key factor for attracting top talent. It can be the difference between an accepted offer and a candidate who chooses another opportunity. However, for business owners and HR professionals, selecting the right retirement plan for their team can be overwhelming and tedious.
Key things to consider include the cost of plan administration, the size and dynamics of your workforce, tax implications, and the potential for employee turnover. Additionally, it’s essential to evaluate various plan providers and consider how they align with your long-term goals.
While many businesses opt for a familiar traditional 401(k) because they are well-known, a range of options exists, each with its own benefits and considerations. Partnering with a knowledgeable financial advisor is crucial in navigating these choices and identifying the plan that best suits your business.
Here are the four most common retirement plans adopted by businesses:
- Traditional 401(k)
Traditional 401(k) plans, the most widely recognized type, are a staple in many large companies. These plans enable employees to contribute a portion of their salary through payroll deductions, which are then invested based on the employee’s selections from the plan’s offerings. From there, employers can match contributions.
A significant advantage of traditional 401(k) plans is their higher contribution limits compared to other retirement plans. In 2024, the maximum contribution limits saw an increase to $23,000, a $500 rise from the previous year. For self-employed business owners, the maximum contribution jumped to $69,000 in 2024, up from $66,000. Those aged 50 or older can take advantage of catch-up contributions up to $7,500 annually, bringing the total to $76,500. Furthermore, employer contributions to these plans are tax-deductible.
You may also explore a Safe Harbor 401(k) option. They’re particularly advantageous for companies with long-term, dedicated employees whom they wish to reward. These plans are exempt from the complex non-discrimination tests that other plans are subject to, allowing employers to favor legacy or high-performing employees with more significant contributions. These plans may also include discretionary profit-sharing contributions with Safe Harbor.
- Cash Balance Plans
Cash balance plans, a type of defined benefit plan, offer a guaranteed amount at retirement. This contrasts with traditional 401(k) plans, which are defined contribution plans where retirement benefits depend on the employee’s contributions and the performance of their investments, placing the risk on the individual.
In cash balance plans, employee control over investment choices is limited. These plans provide a guaranteed return, with the employer assuming the investment risk. This may be attractive to employees seeking more predictability and security in their retirement planning, even at the cost of reduced investment flexibility.
- Simplified Employee Pension Individual Retirement Arrangement (SEP IRA)
SEP IRAs are bit like a fusion of traditional 401(k)s and IRAs, serving as a cost-effective retirement planning option for employers. These accounts are especially suitable for small businesses or sole proprietorships seeking a retirement plan with lesser administrative costs.
Employers make all contributions to SEP IRAs, which are immediately vested. This immediate vesting means employees gain immediate ownership of the funds, enhancing the attractiveness of your benefits package. The flexibility inherent in SEP IRAs is particularly beneficial for small businesses, allowing for the adjustment or omission of contributions during financially challenging years. Also, these contributions are tax-deductible, mirroring traditional IRAs.
- Solo 401(k)
Solo 401(k) plans, also known as one-participant 401(k) plans, are tailored for self-employed business owners without employees, though a spouse involved in the business can also participate. Participants can contribute up to 100% of their annual compensation, subject to the same limits as a traditional retirement plan. Additionally, as their own employer, they can make extra, nonelective contributions, capped at 25%. The same traditional limits for employee deferrals apply.
Another crucial aspect to consider when selecting a retirement plan is the tax implications for both your business and your employees. Different plans come with varied tax advantages and obligations. Because our financial specialists share a seat at the table with tax specialists, we specialize in helping businesses understand the tax benefits of each type of 401(k) plan, ensuring you make a well-informed decision that aligns with your business’s financial goals.
At Davie Kaplan, we help small businesses design and manage company retirement plans that are tailored to meet your needs and goals. To learn more about how we can support your company, please contact us.