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Common Types of Employer-Sponsored Retirement Plans: Choosing the Right Plan for You and Your Employees

No two small businesses are exactly alike, which is why selecting the right employer-sponsored retirement plan for your business is critical. While it’s great that there are so many different company-sponsored retirement plan options, it can also feel confusing and overwhelming. Below, we’ll dive into the company-sponsored retirement plans options, how they compare, and who each plan is best suited for.

Types of Employer-Sponsored Retirement Plans

Simplified Employee Pension (SEP): Best for Businesses Seeking an Easy Setup

A SEP plan allows employers to contribute to a SEP IRA account set up on behalf of the employee. Businesses of any size, including sole proprietorships, S and C corporations, and partnerships, can establish this type of plan. As SEP plans are one of the easiest retirement plans to set up and maintain, they are an excellent choice for employers looking to minimize administrative headaches. In fact, employers simply need to fill out the IRS Form 5305-SEP, which takes a few minutes to complete. Note that these plans are completely employer funded, and employees cannot contribute, so for some businesses, SEPs can be an expensive option.

Savings Incentive Match Plan for Employees (SIMPLE) IRA: Best for Businesses with Predictable Cash Flow

If your business has 100 or fewer employees and your employees earn more than $5,000 per year, this plan type might be for you. Due to its lower fees and fewer regulations, SIMPLE IRAs are much easier to create and maintain, making them an enticing alternative for employers that don’t want the bureaucratic and fiduciary complexities that come with other plan types. Compared to SEPs, which only allow employer contributions, SIMPLE IRAs allow both employer contributions and employee deferrals (to a reduced limit). While employers are required to contribute to employee retirement accounts, this mandatory employer contribution feature can be beneficial as it may encourage higher employee participation in the company-sponsored retirement plan!

403(b) Retirement Plans: Best for Nonprofit Organizations

403(b)s are similar to 401(k)s, except they are designed for nonprofits and other tax-exempt organizations. All employees are immediately eligible to participate and, like 401(k)s, employers can match a percentage of their employees’ contributions. Unlike 401(k)s, however, 403(b) plans aren’t subject to many of the regulations set forth in the Employee Retirement Income Security Act (ERISA) such as non-discrimination testing.

401(k) Retirement Plans: Best for Businesses Who Seek Plan Design Flexibility

As the most common type of employer-sponsored retirement plan, it’s no surprise that a 401(k) offers flexibility in both plan design and features. For businesses looking to attract and retain talent, 401(k)s can serve as a part of a compelling employee benefit package. Employees can contribute to their plan, while features such as vesting and employer matching can act as incentives to encourage them to enroll and continue employment. For employees, a company match is essentially free money, and for employers, offering one can provide certain tax advantages, including a significant tax deduction.

As a business owner, there’s a lot to consider when setting up a company-sponsored retirement plan. Deciding the most appropriate one for you and your business will depend on a number of factors, including the number of employees you have, your business goals, and whether you want to offer a match. But regardless of which plan you decide on, rest at ease knowing that offering a plan now will undoubtedly benefit you and your employees for years to come.

For information on the best time to start a company-sponsored retirement plan, check out our article here.