Creating pension plans for your employees might be a smart move as a small business owner. Let’s explore some reasons why a small business pension plan could be beneficial to both you and your employees.

What are small business pension plans?

Many provisions of the tax code apply to businesses that have fewer than 50 employees. You can take advantage of tax breaks for retirement plans if your business has just one employee—you. Changes in the tax laws that went into effect in 2018 give LLCs and small business corporations many of the same tax advantages that used to be the exclusive domain of large corporations.

What kinds of pension plans are available to small businesses? Here is a rundown of your most common options:

If you’re in business for yourself (you are a sole proprietor, whether or not you have organized your business as an LLC) and your objective is:

• To save the maximum amount of money the tax laws allow, contributing to your retirement account both as your own employer and your own employee, then you should look into a solo 401(k).
• To set aside as much money for your retirement as the tax laws allow but make only employer contributions, you should look into a SEP IRA.
• To start a simple retirement plan that is easy to set up, you should start a traditional IRA.

For an easy-to-administer after-tax plan that lets your money grow tax-free, check out a Roth IRA.

If you have employees and your objective is:

• Setting up a vesting schedule to encourage your employees to stay with your company, consider a traditional 401(k).
• Avoiding nondiscrimination testing, allowing you and your most highly compensated employees to save aggressively for retirement, look into a safe harbor 401(k).
• Setting up a simple pension plan that enables your employees to save for their own retirement pensions, look into a SIMPLE IRA.
• Choosing which years you make contributions to your employee retirement accounts (for example, if your profit margins vary greatly from year to year), look into setting up a SEP IRA.

The bottom line is that small businesses of all kinds have a broad selection of employee pension plans, including solo 401 (k) plans, SIMPLE IRA plans, and traditional 401 (k) plans.

What’s the difference between qualified and non-qualified pension plans?

In 1974, Congress passed the Employee Retirement Income Security Act, also known as ERISA, to protect pensions and to provide a degree of transparency in what happens with pension plan contributions. Qualified plans get certain tax breaks that unqualified plans do not. They also have different levels of protection in the event a company goes out of business.

Here’s the bottom line.

Qualified pension plans are governed by Section 401 (a) of the Internal Revenue Code. They are governed under ERISA guidelines. Both your contributions and your employees’ contributions are owned by your employees. (You can be an employee of your own company.) These contributions don’t appear on your balance sheet, and they are owned by the employee, not your company.

There are limits on how much you can contribute to a qualified plan and how much income can be deferred. But no matter what happens to your company, qualified pension plans cannot be seized by creditors.

Nonqualified pension plans don’t fall under ERISA guidelines. They don’t receive the same tax breaks. Nonqualified pension plans are considered to be assets of the company, which means they can be seized by creditors. Employees who quit lose their benefits under these kinds of plans.

Creating pension plans could help you as well as your employees

The benefit of a small business pension plan is clear for employees—they’ll have a retirement plan to lean back on once they are done working. But did you know there might be benefits to you as the employer as well?

• Recruiting good workers. If you want to attract top talent to your small business, including benefits like a small business pension plan may help. AARP reports that 9 out of 10 Americans believe everyone should have a pension plan. And a skilled worker with a desirable skillset has the luxury to wait for a job that does offer that benefit.
• Lowering employee turnover. Losing employees and having to re-hire is neither cost-effective nor productive for a small business. If you offer employees what they need to be well covered, they might be more likely to stick with your small business.
• Keeping employees motivated. Cultivating a feeling of support with a small business pension plan may give your employees reason to stay motivated. Since some pension plans may even be based on the employee’s salary while working, your employees might be encouraged to perform well and earn more throughout their careers.

Tax benefits: all the more reason for a small business pension plan

You may be eligible for a tax credit for establishing a qualified retirement plan to offer to your employees. This could help offset the cost of creating pension plans for employees.

Talk to your accountant or a tax specialist to discuss your options for saving on taxes by offering a small business pension plan.

Pros and cons of a small business pension plan

Pros. The nice thing about a pension plan is that it gives employees some type of financial support after they are retired. From the employer’s perspective, offering a small business pension plan makes it a lot easier to retain employees.

Since the beginning of 2021, employees have been leaving their jobs at a rate of about 3% per month. In 2022, a survey said that nearly 55 million employees will quit or leave their jobs. Offering a pension plan won’t guarantee that your employees will stay on the job, but it helps, especially with employees turning 65 who are facing the reality of Social Security raising the retirement age with limited options for early retirement health insurance through the healthcare exchanges.

Cons. What’s the biggest drawback to small business pension plans? It’s simple. Returns aren’t guaranteed. Especially if you are a sole proprietor, you need to have multiple ways to save for retirement.

Pension plans can also require the employer to shoulder a lot of the responsibility of funding retirement for employees, depending on what type of plan you choose. But there are also other options out there, such as Defined Contribution Plans, so that your employees aren’t left completely without retirement savings if you can’t afford to provide a Defined Benefit Pension plan.

Creating a pension plan for your employees is up to you. You might find that there are plenty of benefits to offset the cost to your business, including the motivation and loyalty of your employees.

What are my other retirement plan options?

Many companies offer a retirement benefit to their employees in the form of whole life insurance coverage. 

Post-retirement medical benefits are another highly sought-after benefit for the older workforce.

How to get started

Wondering how to set up a pension plan for a small business? Choosing the right retirement benefit to offer your employees doesn’t have to be complicated. Choosing the right investment advisor is the place to start small business retirement plans.

This article is only for general information and is not tax or legal advice. Consult your tax or legal adviser for guidance.