Types of Retirement Plans Startups Can Offer Their Staff

Offering a retirement plan to your startup employees is a good idea. Not only will it help you attract and retain the top talent, you’ll save money on your taxes, and start a retirement plan for yourself.

You’ll find many plans available to suit your needs. Plans vary, but there is one for your small business. Let's look at the types of retirement plans startups can offer their staff. 

#1: Traditional 401 (k)

This is the most well-recognized plan. With the traditional plan, employees can contribute up to $56,000 pre-tax each year through salary deferrals, employer matching, and profit sharing.  

But you don’t have to match or profit share if you choose not to.  

This type of plan is best for startups who want flexibility and have more than eight team members. This is because the administrative costs are most expensive for this type of plan, and they only make sense over eight employees. 

#2: Safe Harbor 401 (k)

You’ll find that this type of plan has the same contribution limits as the traditional 401 (k), but it makes maximizing contributions much easier. Why?  

A Safe Harbor 401 (k) is exempt from annual compliance testing. This is a good thing, because this testing can often cause plan assets to be returned to high-earning employers, thus increasing their tax bill and reducing the amount they’re putting away for retirement. 

You can only choose this plan if you are matching at least 4% of your employees’ contribution. This plan is best for companies that have a high turnover rate or even those with too many plan assets among its highest compensated team members.  

Bottom line – this plan makes it easier for owners and high earners to contribute more. 

#3: Solo 401 (k)

If you’re a solo business with no full-time employees, this is for you. Only you and your spouse can participate.  

In all ways, this is just like a Traditional 401 (k) with the same contribution limits and hardly ever any administrative cost.  

This is an ideal plan for solopreneurs and even startups that expect to hire employees in the future because it can convert to a Traditional 401 (k) when you hire your first employee. 

#4: Simple IRA

If you have less than 100 employees (five to 15 is ideal), this might be an option for you because you can make pre-tax contributions. It’s easy to set up, has little service fees and no IRS filing requirements.  

The drawback – you can only contribute $26,000 per year.  

#5: SEP IRA

While this is the plan for people who are self-employed, it can technically be used at small businesses with employees. It’s only good, though, if you have less than five team members.  

It is an easy option that lets you contribute up to $56,000 or 25% of your annual compensation (the lesser amount). There is no minimum contribution which is also helpful.  

This plan is good for small business owners with no full-time staff and an average income over $75,000. 

#6: Traditional IRA

This is the least expensive retirement account for you to setup and manage.  

You’ll find the expenses similar to other IRA alternatives, but you don’t have any matching or funding costs.  

Final Thoughts

So, how do you choose?  

As a startup owner, the best thing you can do is consult with your financial advisor. This person can help you wade through the pros and cons of each plan and find the best one for your business. 

You also want to then pick a provider and make a budget for any contributions you might make in the way of matching monies as well as administrative fees.  

In addition, decide when employees can use retirement plans by setting up a vesting schedule. Most businesses make employees wait at least six months before becoming eligible. 

Having a retirement plan at your startup helps you save for your own retirement and that of your valued employees, and it generally makes good sense.  Do your research and pick the best plan and administrator you can.

Are you a new startup ready to succeed? Are you looking to get your new business off the ground and watch it rise to success? We are here for you. We can help answer your questions and guide you through the process. Outsource your HR duties, finances, payroll and more to us. Contact Escalon today to get started.

Image: Jorge Vasconez on Unsplash

Author

Neha De

Neha De is a writer and editor with more than 13 years of experience. She has worked on a variety of genres and platforms, including books, magazine articles, blog posts and website copy. She is passionate about producing clear and concise content that is engaging and informative. In her spare time, Neha enjoys dancing, running and spending time with her family.