Why Small Businesses Should Setup Retirement Plans For Employees

Many entrepreneurs pour their blood, sweat, and tears into their businesses. But they also need to think about their futures.

Offering retirement savings plans can help them do just that. This is why small business owners should consider setting up a plan for their employees. There are several benefits to doing so.

Increase Profits

One of the main reasons that small businesses should offer retirement plans to their employees is the potential to increase profits. In addition to a financial benefit to the business, profit-sharing plans can also be an important motivational tool that can help to attract and retain qualified employees. There are small business retirement plan resources to choose from. These types of plans typically include employee elective deferrals and employer profit-sharing contributions.

The tax advantages of retirement plans can be significant for small businesses, especially those considering selling their business in the future. Offering a plan can incentivize employees to stay with a company in the event of an ownership transition, and it could also help attract the attention of potential buyers.

Small businesses can choose from several different retirement plan options, including SEP-IRAs, SIMPLE IRAs, traditional 401(k)s, and Roth IRAs. Each has advantages and disadvantages, but many small businesses can find a solution that meets their needs. Cost is often a concern for small businesses when setting up and running retirement plans, but there are ways to reduce the costs associated with these plans. Even tax incentives are available to help offset these expenses for certain small businesses. In addition, several retirement plan providers can streamline the process and eliminate the need for costly administrative fees.


In addition to boosting employee morale, retirement plans are tax-deductible for small businesses. According to Transamerica’s Small Business Retirement Survey, some even offer tax credits to help offset startup costs. Additionally, employee contributions are a great way for small businesses to reduce their taxable income, and investment gains are only taxed once distributions are made.

The most popular retirement plan for small businesses is a traditional 401(k). However, only some businesses can match employees’ contributions under this type of plan. A SIMPLE IRA or Simplified Employee Pension Plan (SEP-IRA) may be an excellent alternative. These plans are ideal for sole proprietorships, S corporations, and partnerships with no more than 100 employees. These types of plans also allow higher contribution limits than traditional IRAs.

Other options include profit-sharing plans, which can be offered by all sizes of companies and provide flexibility in how money is allocated among employees. They don’t require filing IRS Form 5500 or submitting to nondiscrimination testing and are great for companies that want to give highly compensated employees additional incentives to stay with the company.


There are a few different retirement plan options for small business owners. The type you choose depends on your company size, ownership structure, and whether you want to contribute to employees. The most popular option is a 401(k), which allows employees to contribute pretax salary deferrals and employer matching contributions. It’s worth noting, however, that 401(k) plans are typically more complex than other retirement plan options.

A SIMPLE IRA is another option that allows employers to make fixed or matching contributions of up to 2% of an employee’s compensation. However, it’s important to note that SIMPLE IRAs can require more paperwork than other plans. A Simplified Employee Pension Plan (SEP) IRA is an option for individuals and small business owners who don’t need a large contribution limit or the flexibility of a 401(k). This plan can also be more cost-effective than other options, as it doesn’t require setup or annual maintenance fees.

Attract and Retain Employees

Increasingly, workers want and need the ability to save for retirement. Yet a significant number of small businesses do not offer retirement savings plans. This may be due to costs, the ability to administer the plan, or lack of employee demand for a savings vehicle.

Regardless, small business owners should consider adding a retirement savings option to their employees’ benefits package. The right solution can help employees save tax-deferred money through payroll deductions, which can benefit both the employee and the company. This can allow employees to jump-start their savings by using compounding interest. At the same time, the company can take a federal tax credit for any contributions made.

Small business owners have 3 basic retirement plan options: 401(k), SIMPLE IRAs, and SEP-IRAs. A 401(k) plan offers employees a tax break on their contributions and investment gains; however, it requires an employer match. A SIMPLE IRA plan allows for higher contribution limits but does not require an employer match. A SEP-IRA plan is a great solution for sole proprietors, contractors, and freelancers. In a recent study, 93 percent of small and midsize business owners believe their workers prefer a higher salary over better retirement benefits. These results suggest that many companies emphasize pay and other employee-related perks, such as vacation time and health insurance.