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Why Your Small Business Should Consider Implementing A Retirement Plan Program

Posted by Corey F. Schechter | Mar 10, 2017 | 0 Comments

Contributing Author: Dianne Schechter

Far fewer of today's younger workers will be covered by pensions than in the past. Today, 50 percent of near-retirement households (age 55-64) that participate in workplace retirement plans are covered by a traditional pension, according to the National Institute on Retirement Security, and just 30 percent for age 35-44 are covered. Only 46 percent of employers offer defined contribution retirement plans, according to the U.S. Bureau of Labor Statistics, and only 58 percent of civilian workers have the chance to save for retirement with a workplace-sponsored plan. That means that 50 million workers in the U.S. don't have access to a workplace retirement plan.

In 2016, 26 percent of U.S. workers had less than $1,000 saved for retirement. And it's not just workers; it's also business owners, freelancers and independent contractors. According to the Freelancers Union, a non-profit organization providing advocacy and health insurance to its members, there are an estimated 54 million independent workers. While millennials get credited for being the driving force of entrepreneurship, about half of new businesses are started by Baby Boomers. 

Regardless of their generation, 60 percent of independent contractors and small business owners report not saving enough for their retirement. The good news is that the tax code provides several benefits to encourage saving for retirement for small business owners and their employees.

Below are a few reasons why establishing a retirement benefit plan is beneficial to you as a business owner.

1) A Small Business Retirement Plan Attracts Talent:

A retirement plan demonstrates a strong conviction that your business is going to be around for a long time. Would you want to apply for a company that could be gone in just a year? An employer-sponsored 401(k) proves that you have a long-term financial commitment with your business and your employees.

Also, you allow your employees to effectively reduce taxable income for this year and defer those taxes until retirement when they're more likely to be in a lower tax bracket. For example, in 2017, a single filer with a $60,000 annual salary would have a tax liability of roughly $10,738.75. With a $7,000 contribution to a traditional 401(k), that same individual would reduce her tax liability to $8,988.75! On the other hand, if the same individual were to contribute the same $7,000 to a Roth 401(k) account — rather than a traditional 401(k) —then she pays taxes now, but that money would grow tax-free forever. Nobody can deny the tax benefits of saving for retirement!

2) Tax Breaks For The Small Business Owner:

Eligible small business owners (who have fewer than 100 employees who were paid at least $5,000 in the previous year, have at least one non-highly compensated employee participating in the plan, and haven't offered a retirement plan in the last three years) can use Form 8881 to claim a credit of up to $500 for qualified startup costs incurred in establishing or administering an eligible employer-sponsored plan. Eligible startup costs include setup and administration costs of the plan, and expenses to educate your employees about the plan. You can claim this credit for each of the first three years of the plan, and may carry it back to other tax years if you can't use it in the current year.

To encourage employer matching contributions to retirement accounts, employer contributions are deductible on the employer's federal income tax return to the extent that the contributions do not exceed the limitations described in section 404 of the Internal Revenue Code.  This tax-advantage can be used during salary raises with your employees.

3) Important Updates Under New State Laws:

Another reason why it's better to set up a small business retirement plan now, or at least to get started planning for your business' retirement account so that you can choose the one that's best suited for your unique situation, is that soon you might be forced to sign up for a potential subpar option. Several states, including California, Connecticut, Massachusetts, and Virginia, have already approved bills requiring feasibility studies to implement retirement plans for small businesses or mandating small businesses to either offer retirement plans or enroll employees in retirement savings program run by the state.

Take California for example. The SB-1234 Retirement Savings Plans bill will become effective in January 1, 2017, requiring small business with at least five employees and no small business retirement plan to participate in a state-sponsored individual retirement account (IRA) managed by a state-selected financial company. Businesses with 100 employees have to comply first. Businesses with 50 to 99 employees and those with 5 to 59 workers will have one year and two years, respectively, to comply after open enrollment for the state-sponsored IRA begins. Once this state-sponsored program is set up and ready for enrollment, the compliance clock will start ticking for all California small business owners.

Similar payroll-deduction retirement savings programs will take effect as early as June 2017 in Oregon and Illinois. If you're situated in Connecticut, Colorado, Maryland, Minnesota, New Jersey, New York, Utah, Virginia, and Washington, contact the appropriate state government agency to get the latest update on legislation potentially affecting your small business. If you're situated in other states, it doesn't hurt to check just in case and explore your options.

4) The Bottom Line-Take Action Now:

Set up a small business retirement plan before your state forces you to participate in theirs. No matter what type of retirement account you're considering, try setting it up by December 31st of the current year so that any contributions to the plan count towards the current tax year, and nobody has to wait until the next year to enjoy the tax advantages.

Meeting the December 31st deadline allows any employer matches done before next year's Tax Day or the date that the plan holder files taxes — whichever is first — to still count for the current tax year. There's no reason to delay any longer the tax breaks that you and your employees can get today!

Butterfield Schechter LLP is Southern California's largest law firm focusing its practice on employee benefits. Contact us today to assist in establishing an employer-sponsored retirement benefit plan for your business.

About the Author

Corey F. Schechter

Corey Schechter practices in the areas of Employee Benefits, Employee Stock Ownership Plans, Pension and Profit Sharing Plans, ERISA, ERISA Litigation, Business Law, Qualified Domestic Relations Orders (QDROs), and Employment and Labor Law.


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