Your Small Business Should Offer a Retirement Plan This Year—Here’s Why

401k benefits employee benefits HR Retirement staffing

“Do you offer a 401(k) plan … with a company match?” After a brief eye twitch, you regain composure and tell the job applicant that you do not offer a retirement plan. You then proceed to highlight some of the employee benefits you do offer. But in the back of your mind, you’re still thinking about that 401(k).

Have you ever wanted to offer a retirement plan to your team, but high administrative costs held you back? You’re not alone—many small businesses face hurdles when it comes to offering retirement plans. In fact, the number of small businesses that offer retirement plan benefits is so low (only
26% offer them) that federal and state governments have gotten involved.

Is this your year to offer a retirement plan? From compliance with state mandates to enhanced benefits, take a look at three reasons to offer retirement plans in 2023.

Why your small business should offer a retirement plan

1. Your state may require it

For certain employers in several states, retirement plans aren’t optional.
State-mandated retirement plans require employers to either enroll employees in a state-sponsored program or offer a qualifying retirement plan alternative.

For the most part, state-sponsored retirement programs are Roth IRAs (individual retirement accounts). If you opt for the state program, you’re off the hook for contributions—you simply need to withhold employee contributions from their paychecks and remit them to their accounts with the state.

Again, you can choose to offer a qualifying alternative instead of enrolling employees in the state plan. Alternatives include 401(k) plans,
SIMPLE IRA plans, a qualified annuities, and Simplified Employee Pension plans. Offering your own retirement plan (a.k.a. one that’s not facilitated by your state) doesn’t have to be hard. Some payroll providers have partnered with retirement platforms to offer affordable retirement plans that integrate with the software.

And if you choose not to participate in your state’s program
and refuse to offer a qualifying alternative, you’ve got another thing coming: penalties. Non-compliance may result in hundreds or thousands of dollars in penalties (and who wants that?).

States with a mandated program include California, Connecticut, Illinois, and Oregon, to name a few. Keep in mind that some state mandates only apply to businesses with a certain number of employees (e.g., five or more). Other state mandates apply to businesses with a certain number of employees who have also been in business for a set number of years.

Make sure to review your state’s rules for more information. And stay up-to-date with new laws to find out if a state-mandated retirement program is coming to your state.

2. You can score tax credits through SECURE 2.0

If the startup and contribution costs of offering retirement plans have been holding you back,
SECURE Act 2.0 may change things for you. SECURE 2.0 stands for Securing a Strong Retirement Act. Signed into law at the end of 2022, SECURE Act 2.0 aims to increase the number of employers who offer retirement plans and the number of employees who take them up. It’s a continuation and expansion of the SECURE Act of 2019.

So, why does the passage of SECURE Act 2.0 make this the perfect time to take up a retirement plan in your small business? Thanks to SECURE Act 2.0, employers with 50 or fewer employees can claim a 100% tax credit to cover administrative costs (up to $5,000 annually) of establishing a retirement plan. And if you have more than 50 employees (but less than 100), you can claim a 50% tax credit to cover administrative costs of up to $5,000 annually. You may also be eligible for additional tax credits for employee retirement plan contributions and military spouse coverage.

Like any tax credits, you need detailed records to back up your 401(k) tax credit claims.

3. Employees love them

Maybe retirement plan state mandates don’t apply to you right now. Or, maybe you’re not interested in the tax savings that come with offering a retirement plan. But, it might still be your year to offer a retirement plan simply because employees love them.

Eighty-one percent of employees think retirement benefits are essential during a job search. More than that, many workers expect retirement plan benefits. And if you fail to offer retirement benefits, you may miss out on placing your number one job candidate or hanging onto your top employee.

Sure, retirement plans are employee benefits. But here’s a quick rundown of some business benefits of offering them:

  1. Attract job candidates
  2. Retain employees
  3. Increase employee productivity

Steps to offering a retirement plan

Whether you want to boost your employer brand, stay compliant with your state, or score tax credits, offering a retirement plan doesn’t have to be complicated. Here are a few simple steps to get you started, courtesy of the
Department of Labor:

  1. Decide whether to set up the plan yourself or streamline the process with a retirement plan provider.
  2. Create a written plan that details the ins and outs of your retirement plan.
  3. Arrange a trust to hold contributions.
  4. Develop a record-keeping system (hanging onto records is a must!).
  5. Provide employees with retirement plan information.

If you’re subject to a state mandate, make sure the alternative retirement plan you choose qualifies. Consult your state for more information.

Once your retirement plan is set up, you’ll be in charge of withholding contributions from employee paychecks (and contributing, if applicable).