The Small Business Guide to Pensions in the US

If you're a small business in the US, something as big as pensions can seem like a massive undertaking. However, it may not be as complicated as you think. Read this quick and simple guide to what pensions mean for small businesses.

Why is a pension plan important?

Estimates suggest that US workers will need between 70 and 90 per cent of their income in a pension fund to enjoy a comfortable lifestyle once they retire. As a small business owner, you have an important role to educate, advise and support the people that work for you in these matters.

There are certain incentives that you can open yourself up for when introducing a pension plan for your employees. Employees are more likely to stay with your company for a longer time if they feel they are supported by you in this way, and will be more loyal to you in the long term.

This is a significant benefit because of the high costs of recruitment and losing talent, which small businesses feel much more than larger organizations. There are also a number of tax advantages:

• Money in the plan is not taxed
• Employee contributions to the plan are not taxed
• Your contributions are deductible from an employee's income

What other help do you get?

There are a few ways that providers help to support employers and employees who may struggle to contribute enough money to the plan during their working life. This can be older staff who don't have as much time before they hit retirement age or those on a low income, but it's good to know what options are there to help your company's plan.

• Providers can give 'catch-up' plans to people who start contributing to a plan later in their working life to help them get together a reasonable sum
• 'Saver's credits' are available for low and middle-income earners to boost their savings
• Small businesses can get tax credits to help with the initial costs of setting up a plan, though only certain programs (SEP, SIMPLE) apply. This equates to 50 per cent of your implementation costs up to $500 per year for each of the first three years of the plan

What plan should I introduce?

There are a number of types of plans that you can introduce, and which one will suit you best depends largely on your business and what will best support your employees. Most private-sector retirement vehicles are either Individual Retirement Arrangements (IRAs), defined contribution plans, or defined benefit plans.

IRA

Often people assume that IRAs are something that employees do by themselves, but there are ways you can help as an employer. The amount a contributor receives depends on the earnings on the funds

Defined contribution plans

These have more of a certain role for the employer, as you are responsible for establishing the plans. No specific amount is set but contributors (the employee, employer, or both) put into the plan, which is sometimes a defined rate. At retirement, an employee receives the accumulated contributions plus earnings (or minus losses) on the invested contributions.

Defined benefit plans

Employees with these have a set amount that they can expect to receive when they retire, as long as they keep to the required contributions. This is usually calculated based on a percentage of pay, multiplied by the amount of years worked under the employer offering the plan.

As a small business, you can offer any of these plan types, and your provider is likely to offer more than one type, pre-approved by the IRS.

What are the advantages and disadvantages?

Each plan type comes with its own set of advantages and disadvantages. You may find you're limited depending on how many employees you have in your business, or the amount you are willing to invest setting it up.

IRA plans are the most common type, largely because they are the easiest to set up and implement, while allowing a great deal of flexibility when it comes to contribution levels. The sum is taken straight from the employee's income, so involves a minimal amount of fuss and documentation. As long as you have at least one person working for you, you are eligible to have an IRA plan, meaning all businesses can set one up.

However, there are limits on the amount you can contribute each year, which may not be ideal if you have a lot of older workers looking to make up a decent pension pot. This guide can give you more information on an IRA pension plan and what type may be most suitable for your business.

Defined benefit plans can be difficult for small companies to introduce because a lot of the burden falls on the employer to contribute to the pension sum. This can be attractive to larger organizations that want to draw in highly qualified employees and offer competitive benefits, but those with less money to burn may not be able to make this commitment.

The difference between this and a defined contribution plan is that employees and employers are equally responsible for making a decent sum at the end of the scheme. However, there are still certain requirements that must be met by the business, regardless of circumstances like economical changes. This may mean a plan like this is also more challenging to implement for smaller companies.

Finding the best fit for you

Ultimately, the right plan will depend on your circumstances as a business and what you can afford to offer to employees. It's important that you recognize that what you want to provide may not be what you'll be able to give them. The Department of Labor helps small businesses calculate the best method to help your employees prepare for their retirement.