Retirement Plans for Small Businesses in Hawaii

Offering your employees the option of contributing to a retirement plan might seem like something only Fortune 500 companies can afford to do – or benefit from doing. But that’s actually not true. These days, even very small businesses can gain significant benefits by offering employees retirement plans. Here are just a few of those benefits. 

Employee Motivation and Retention 

When your employees feel that you’re taking care of them, they are more motivated to perform at their best every day. That’s the reasoning behind most benefits offered by employers, and it’s true. Employees feel valued when you help them plan for their future and save for the retirement of their dreams, and that’s what retirement plan offerings can help you do. 

Plus, having employees leave your company frequently has many costs. You need to spend more to hire new workers, train them, and build up their institutional knowledge. Retaining your current employees is better for your bottom line and the success of your business. And offering retirement benefits, like the option of contributing to a retirement plan, is a highly effective way to retain employees without breaking the bank on salaries and bonuses. 

Higher Contribution Limits as a Business Owner 

The benefits don’t stop with your employees. There are serious benefits to you as the business owner when you offer retirement plans through your business. Depending on the retirement plan you choose, you can often benefit from a higher yearly contribution limit. This is especially beneficial as you get closer to retirement and want to accelerate your savings. 

Tax Credits and Deductions

As a business owner, you know how important it is to take advantage of every tax credit and deduction available for your business. That can mean the difference between success and struggle. The good news? Retirement plan contributions for both your employees and yourself can, in many cases, offer tax savings. 

These savings depend on the exact plan you choose, of course, but employer contributions are often deductible as a business expense. Plus, the initial startup costs for introducing a retirement plan to your business can be partially and retroactively covered with a significant tax credit.

Reaping the benefits of more satisfied employees and a lower tax rate? That’s definitely a win-win. 

For business owners choosing a retirement plan for their business, there are a variety of options available. It’s important to take some time to explore these options and identify the choice that is the best fit for your business.

IRA-Based 

An IRA is an Individual Retirement Account, and they’re common among people who don’t have the option of opening a 401(k) through an employer – which can apply to business owners and self-employed people. It’s important to note that certain eligibility requirements must be met in order to open IRA accounts. These requirements relate to income and access to employer sponsored plans. 

There are several types of IRA-based plan options for business owners to consider. 

A traditional IRA is a good choice for new business owners – it’s simple to set up and allows you to contribute $6,000-7,000 per year. You contribute pre-tax dollars, the money grows tax-free, and then it’s taxed as income after you turn 59 ½. These IRAs operate in a very similar way to 401(k)s, except you fund them yourself. Setting these types of accounts up is usually simple and fast. 

A Roth IRA is a popular option for business owners who think they’ll be in a higher tax bracket after retirement. That’s because with this plan, you contribute taxed dollars that grow tax-free. You can withdraw them tax-free as well after age 59 ½. The same $6,000-7,000 yearly contribution limit applies here. Just like the traditional IRA, these are easy to set up and fund if you meet the eligibility requirements, but over time that lower contribution limit can hinder your retirement savings. 

A SEP IRA, or Simplified Employee Pension plan, lets you help your employees save for their retirements. It lets business owners contribute to traditional IRAs on behalf of their employees. It works best for companies that have only a handful of employees, partners, or a single-person shop. SEP IRAs operate mostly like a traditional IRA, except that the business owner can contribute up to 25% of the value of an employee’s compensation to the plan. Employers are not required to contribute every year, so they have the flexibility to forego contributions during leaner years.

A SIMPLE IRA, or Savings Incentive Match Plan for Employees plan, works better for bigger businesses who have up to 100 employees. SIMPLE plan contributions can be made to the traditional IRA accounts of employees. And these contributions are deductible as a business expense, so they can offer significant tax savings. As their name suggests, SIMPLE plans are quite easy to set up as well. 

Defined Contribution 

These kinds of plans are funded mostly by employees, so they’re a good option if you have a larger employee base and don’t want to take too much risk on the business itself. The classic example of a defined contribution plan is the 401(k). 

A profit-sharing plan allows an employer to share the company’s profits with employees, which can be highly motivating for employee performance. Business owners can contribute up to 20% of self-employment income or 25% of employee salary. These kinds of plans are subject to several requirements to ensure employees are treated fairly. They can also allow you to more highly reward employees who stay longer with the business, keeping retention rates high and avoiding paying too many benefits to short-term employees. 

A solo 401(k) plan is, like the name suggests, just for the self-employed. If your business has employees, this plan isn’t an option (unless your employee is also your spouse). However, a solo 401(k) can give self-employed people many of the benefits of an employer plan without having to actually work for one. They have high contribution limits – $58,000 in 2021 – and are very easy to open. They come in both Roth and traditional options, so you can choose based on what you expect your tax burden to be like in retirement. 

Defined Benefit 

For self-employed business owners with a lot of income and no employees, a defined benefit plan can be very attractive. You may also know these plans as pension plans.

Contributions are made by you (if you’re self-employed), or the business if applicable. You must contribute enough every year to fund the target annuity in retirement, and you are guaranteed a certain monthly income every month depending on the length of service to the company. These plans offer much higher tax-deductible contribution limits than defined contribution plans, but contribution requirements are much higher as well. That’s why these plans work best for very high earners who can commit to the annual contributions. Because these plans can become very expensive very quickly, you won’t find many modern businesses still offering them.

Finding the right retirement plan for your business isn’t easy, even after reading about all the available options above. There are so many choices for small business owners when it comes to choosing a retirement plan for themselves, their business, and their employees. But there are a few steps that can help you evaluate your options and pick the right retirement plan. If you need further help, you can take these considerations to a financial advisor like 3 Financial Group, based in Honolulu, who may be able to add helpful insight. 

Consider Your Primary Objectives 

There are many reasons you might be thinking of opening a retirement plan for your small business. But to choose the plan that really works best for you, you need to identify your primary objectives in creating a plan. Are you looking to take advantage of maximum tax savings? Are you looking to increase employee retention and motivation? Are you looking to save for your own retirement? 

Considering which of your objectives comes first can help you pick the plan that fits your needs best. No one plan can do it all, so determine what is most important and go from there. 

Consider Your Business’ Size and Demographics 

Each retirement plan option for small businesses has benefits that depend on how many employees you have, and what kind of employees they are. If your business consists solely of you and your spouse, for example, you will want to look at very different plans than someone who owns a business with 75 employees. 

Also, your employee demographics can matter. Do you have lots of younger, shorter-term employees who move on quickly? Or a small team of committed long-term employees who have been with you since the beginning? Do you hope to tailor retirement plan benefits to employee output, longevity, or position?

Your best-suited plan will change based on your answers to these questions. 

Opening a retirement plan for your small business is a great idea – but it doesn’t come without risk. By sponsoring a retirement plan for your business, you are taking on two sets of fiduciary duties: you become the named administrator with legal responsibility for the plan, and the plan administrator in charge of how the plan is administered. 

As a fiduciary, you’re held to high standards for running and administering your plans to help keep your business and your employees safe from unnecessary financial risks. You can read more about the fiduciary duties and laws on the Department of Labor website. 

This fiduciary duty is a big commitment for small businesses, and that’s why many opt to bring in outside experts like a financial advisor, investment manager, and/or administrator to help ensure they’re in line with the law. 

Some financial advisors who work with small businesses to implement and maintain retirement plans will also offer retirement planning classes to your employees. These classes not only benefit your employees, but also help educate them on the value of the benefit you’re offering, which can help foster the gratitude and goodwill that facilitate healthy workplace relationships and increased productivity.

Finding the right small business retirement plan provider can help you find the retirement plan that’s right for you and your business. The right plan provider can also ensure you’re getting the full benefit of the tax breaks you’re entitled to and that you’re adhering to your fiduciary duties. 

Picking a small business retirement plan provider in Honolulu starts by thinking about your business goals and size, and looking for a provider with significant experience in your preferred type of plan or your business type. And of course, you’ll want to interview potential providers to see if they can answer all your questions and meet your needs. 

The financial professionals at 3 Financial have years of experience helping small business owners navigate the legal and financial landmines of retirement plan sponsorship, while also maximizing benefits.

Choosing a retirement plan for your small business is a pretty big task – and it’s one you shouldn’t undertake alone. Get the right financial help and guidance to pick a plan with the maximum benefit and minimum risk for you and your business by contacting us today.