Question: The employees have expressed an interest in a retirement plan. What are my inexpensive options to set up this type of benefit?
Answer: If the employees want to contribute to a company retirement plan and your company has less than 100 employees, the SIMPLE IRA is a good starter plan. They are inexpensive to set up and there is no annual Form 5500 filing requirement with the government. Most employers contribute the employer match of 100% on the first 3% contributed by the employee as an incentive to encourage employees to participate. Only the employees who actively contribute their own money to the plan will receive the matching contribution. The SIMPLE can be set up to give a 2% contribution to all eligible employees instead but this set up is fairly uncommon. The downside to this type of plan is only small employers are allowed to have them. Small for this purpose means that there are less than 100 employees with the company. Also, an employer isn’t allowed to contribute any additional contributions beyond the 3% match or the 2% non-elective amount so if your accountant is frantically looking for deductions, you won’t find anything additional from this plan.
Another inexpensive retirement plan option to consider is a SEP, although a SEP is not going to allow employees to contribute their own money to the plan. Only the company can make contributions to this type of plan so it is commonly paired with a non-ERISA 403(b) plan for tax exempt entities. The non-ERISA 403(b) plan is exempt from an annual Form 5500 filing requirement and so is the SEP. We frequently see this arrangement when there is a board of directors involved and the decision is made once a year to give all staff a flat percentage contribution like 3% or 5%.
These two types of plans are inexpensive to set up and there are usually no annual accounting fees associated with them. The calculations tend to be simplified but eligibility is pretty inflexible. As the company gets bigger or needs larger deductions, the company should look into other retirement plan options to see if the additional costs are worth the additional flexibility of the 401(k) plan.