2-10 Employees

Growing your team from just you up to your first ten employees is one of the difficult challenges faced by business owners. That initial growth is hard won, but once you are there scalability becomes (or at least feels) more organic. Providing a retirement plan for your growing team isn’t just a nice to have, it’s an essential component of team retention. All that hard work, all that training could be for naught if your key people up and leave because your retirement plan doesn’t meet the grade. Growth is great, but your plan needs to grow with you.

There are plenty of plan options for small businesses with up to 10 employees. Here’s a quick summary of your options.

Cash Balance Plans

A Cash balance plan is a relatively new variety of a Defined Benefit.  It is subject to the same reporting, documentation and Actuarial certification requirements of a defined benefit plan. The benefit, however, is expressed in terms that are more characteristic of a defined contribution plan. In other words, a cash balance plan defines the promised benefit in terms of a stated account balance rather than an annual benefit.

Defined Benefit Plans

One of the biggest worries about retirement is having a plan that provides enough income to live on. A DB Plan might be the right option if you are older, are playing a bit of catch up with your retirement savings and want to contribution more than the maximum amount allowed in a SEP or Profit Sharing Plan ($57,000).  For example, a 45 year old owner earning at least $225,000 would be able to contribution approximately $120,000 to a defined benefit plan rather than the SEP or Profit Sharing limit of $57,000

What is a ROTH plan?

A variation of traditional individual retirement accounts (IRAs), a Roth IRA is set up directly between an individual and an investment firm. The employer is not involved.

This gives IRA holders a greater degree of investment freedom than employees have with 401(k) plans, even though the fees charged by those providers are typically higher.

In contrast to the 401(k), after-tax money is used to fund a Roth IRA. As a result, no income taxes are levied on withdrawals during retirement. While in the account, any investment gains are untaxed.

Profit Sharing Plans

Profit sharing plans are the most common type of DC plan.  Profit Sharing Plans can incorporate many “buckets” for your retirement plan savings…a 401(k) feature, an employer matching feature, or employer only contribution feature contributions from the employer are completely discretionary. For employer discretionary only, this means there are no employee contributions (401(k) deferrals made to the plan and the company decides from year to year how much to contribute—or whether to contribute at all—to an employee’s plan. The contribution is allocated (divided up) among participant based on the allocation method in the plan.  By utilizing the appropriate allocation method, the contribution cost for the employee as a % of pay is generally much less than the owner.  Sometimes the employee cost can be as low a 5% of pay when the owner is receiving 25% of pay.  This differs from a SEP where the same % of pay is contributed for all employees.  As such, with a SEP, if the owner maximizes their contribution at 25% of pay, they must also make  a 25% of pay contribution for their employees.  In many cases, as this can be quite costly, once an employer has employees, they generally cease making SEP contributions, thus hindering the ability of the business owner to accumulate retirement savings.

If the company does not make a profit, it does not have to make contributions to the plan. (But a company does not need to be profitable to have a profit-sharing plan.) This flexibility makes it a great retirement plan option for small businesses or businesses of any size. Plus, it aligns the financial well-being of employees to the company’s success.

Non-Qualified Deferred Plans

A non-qualified, deferred compensation (NQDC) plan allows you to earn wages, bonuses, or other compensation in one year but receive the earnings—and defer the income tax on them—in a later year, or when you retire. Doing this provides income in the future (often after you’ve retired) and may reduce the tax payable on the income.

Conclusion

It’s no longer just about you, it’s about your team as well. That doesn’t mean that you need to give away the store with a SEP.  It’s incredibly important to keep a watchful eye on the retirement plan you have in place. With the right type of plan, you can save for your retirement while providing a meaningful benefit for your employees .  One of the most commonly quoted reasons for an employee moving onto a different organization is to benefit from a better/more comprehensive retirement plan.

Whether or not you decide to change plans, it’s important to review your plan regularly. Retirement is calling; don’t get caught out with a badly designed plan and watch as your employees walk out the door.