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Have a client starting a small business retirement plan? That’s a great idea.

A retirement program can help your client and their employees.

Reap the benefits

Your client may be able to get tax deductions for starting and contributing to a qualified retirement plan. If they have never had a 401(k) or 403(b) plan, there’s a tax credit for starting one.
 

Save on expenses, too. Businesses that have never had a 401(k) or 403(b) plan may claim tax credit of 50% of startup costs for the first three years.1
 

They're not required to make an employer or "matching" contribution. But if they do contribute, the amount is tax deductible, up to a certain limit.

 

Recruit and reward

Giving employees benefits is a great way to make sure they’re happy, loyal to the organization and ready to help the business succeed.
 

Pay is one thing, but retirement benefits are another (hint: they want both)

  • 81% of employees, regardless of age, say a retirement plan is important. In fact, it’s prioritized as the second most valuable benefit, only behind medical insurance.2
  • The #1 reason employers offer benefits/perks is to retain current employees.3


Retire

It’s a win-win! A retirement program helps your clients' employees save for retirement and your clients save for their own retirement. And employees retiring on time can help your clients' bottom line.

 

Employees count on their employer retirement plans.

Workers rely on their workplace retirement plans as a source of income – 8 in 10 believe this will be a major or minor source of income in retirement.4

Participating in a retirement plan helps drive retirement confidence. When employees (or their spouses) have money in a plan, they’re nearly twice as likely (78%) as those without money in a plan (41%) to be very or somewhat confident they’ll have enough money to live on throughout retirement.4

Types of retirement plans

If your client has decided to start a retirement plan, the next step is to determine the plan type.
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Defined contribution: 401(k) and 403(b)

  • Popular for businesses.
  • Easier for employees to understand than other plan types.
  • Recognized, so employees may be more comfortable.

Typical employer:

  • All businesses (except governmental agencies).5


Advantages for employer:

  • Federally tax-deductible company contributions (generally).
  • Tax credit for first-time retirement plan sponsors.1
  • Options to offset administrative costs.
  • Flexible plan design.

Considerations:

  • The employer is not required to contribute.
  • Employees can defer up to $19,500 ($26,000 if over age 50) or 100% of compensation.6
  • Allows Roth (after-tax) contributions, a vesting schedule and loans.

Pooled Employer Plan (PEP) – 401(k) only

  • New type of multiple employer plan as a result of the SECURE Act
  • Allows for easier pooling of unrelated employers’ plans
  • Administered by a “pooled plan provider” and named fiduciary7
  • Effective for plan years beginning Jan 1, 2021 and later 

Typical employer:

  • Most businesses (except government agencies)
  • PEPs are not available to tax-exempt or certain educational organizations that offer 403(b) plans


Advantages for employer:

  • Should encourage smaller employers to pool plans for administrative ease and efficiency
  • Added expertise – rely on experienced professionals to service the plan and manage the plan’s investment lineup
  • Helps save time – outsource administrative tasks and free up valuable time for employers to focus instead on their business
  • Reduces risk – shift risk to designated fiduciaries along with those related plan fiduciary tasks7


Considerations:

  • Fiduciary responsibilities may be reduced for adopting employers, but there could be less flexibility in plan design decisions and less control around investment decisions
  • A PEP is treated as a single plan for government reporting purposes: one plan document, one Form 5500 filing, and one plan audit as necessary
  • As a 401(k) plan, employees can defer up to $19,500 ($26,000 if 50 or older) or 100% of compensation.8
  • May allow Roth (after-tax) contributions, a vesting schedule and loans.

SEP IRA

  • Generally for very small businesses and the self-employed.
  • Establishes an individual retirement account (IRA) for each eligible employee.
  • Completely funded by employer contributions.
     

Typical employer:

  • Businesses with 10 or fewer employees.
     

Advantages for employer:

  • Federally tax-deductible company contributions (generally).
  • Easy administration. No requirement on frequency or amount of contributions.
  • No employer administration fee.
  • Minimal paperwork.
     

Considerations:

  • The employer can contribute up to 25% of compensation or $57,000, whichever is less.5
  • Does not allow Roth (after-tax) contributions, a vesting schedule or loans.
  • May establish up until the extended due date of the employer’s tax return.
  • May require the employer to cover employees who would be excludable under standard 401(k) plan provisions.

SIMPLE IRA

  • Requires employer contributions.
  • Must be the only qualified plan employer maintains within the calendar year.
     

Typical employer:

  • Businesses with up to 100 employees (including self-employed).
     

Advantages for employer:

  • Federally tax-deductible company contributions (generally).
  • Easy administration. No compliance testing or annual Form 5500.
  • No employer administration fee.
  • Minimal paperwork.
     

Considerations:

  • The employer, can contribute either by matching up to 3% of each eligible employee’s salary or contributing 2% of each eligible employee’s salary, regardless of participation.
  • Employees can defer up to $13,500 ($16,500 if over age 50).5
  • Does not allow Roth (after-tax) contributions, a vesting schedule or loans.
  • Must establish between Jan. 1 and Oct. 1.
  • May require the employer to cover employees who would be excludable under standard 401(k) plan provisions.
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Get all the details

Startup plans for less than 100 employees
Simply Retirement by Principal®
Startup plans - $10 million in AUM
Principal® EASE
$1 million - $10 million
Principal® IMPACT
1 Limited $500 to $5,000 per tax year – consult a tax advisor for specifics.
2 Mind the Gap: Do employers understand employee’s benefit priorities, LIMRA 2018.
3 2019 Principal Financial Well-Being Index: Business Owners.
4 2020 Retirement Confidence Survey, EBRI, April 2020.
5 403(b) plans are offered by tax-exempt or certain educational organizations.
6 Internal Revenue Service limits as indexed for the 2020 calendar year. For IRS contribution limits in future years, go to IRS.gov.
7 The decision to delegate to and ongoing monitoring of the Pooled Plan Provider (PPP) and 3(38) investment manager is the fiduciary responsibility of the adopting employer.
8 Internal Revenue Service limits as indexed for the 2021 calendar year. For IRS contribution limits in future years, go to IRS.gov. Plan compliance testing may limit contributions.
 
For illustrative purposes only.
 
PQ12337F | 1331530-092020 | 11/2020