Think Your Business Is Too Small To Offer Retirement? Not Anymore.

However, there are a number of low-cost plans that are designed specifically for small businesses offering retirement plans. And a new Final Rule recently issued by the Labor Department is designed to widen accessibility to affordable retirement plans for employees who work at small businesses. So, what are the affordable retirement plans you can offer your employees?

Easier to Join Multiple-Employer Plans

The rule will make it easier for small businesses to join together to create joint retirement plans that are referred to as multiple-employer plans, or MEPs.

“MEPs allow employers to form a pooled 401(k) retirement plan, offering benefits through the same administrative structure but with generally lower costs and less compliance burden than if each employer offered a separate plan,” explained Alicia H. Munnell, the director of the Center for Retirement Research at Boston College, in an opinion piece on MarketWatch last September.

Before the rule, employers participating in a MEP had to be in the same industry or share some other kind of similarity, like membership in a trade association.

The new rule loosens this requirement by allowing unrelated businesses to join together to form a MEP. You can now create a MEP with other businesses if you are all located in the same geographic area — for example, in the same state or metropolitan area. Also, other businesses in the same industry as yours can join together to offer their employees a MEP regardless of where they’re located.

By joining together to offer employees a retirement plan, you can use economies of scale to lower risk and plan costs. And your employees who choose to participate receive a higher quality plan.

Open vs. Closed MEPs

Munnell added that the SECURE Act, which was signed into law late last year, will “make it much easier for small employers to join a so-called ‘open MEP’ by removing the requirement for a common bond. It would also allow financial institutions to operate MEPs.”

Membership in an open MEP is open to any business, regardless of whether there are any similarities between the businesses. However, open MEPs aren’t considered to be single plans under the Employee Retirement Income Security Act (ERISA), which means that each business must satisfy ERISA plan requirements individually. Therefore, open MEPs tend to be more burdensome to small businesses.

Closed MEPs, in contrast, are treated as a single plan under ERISA. Participating businesses share the risk and administrative burdens of plan sponsorship, which enables them to provide a better and less expensive plan to employees.

The new rule makes closed MEPs available to groups of businesses that either operate in the same trade, industry, line of business, or profession or are located in the same geographic area. The new rule also allows self-employed individuals and their families to join closed MEPs. Some “working owners” such as sole proprietors can now join a closed MEP even if they don’t have any employees.

Other Options for Small Businesses

What if an MEP is not for you? In addition to MEPs, there are several other types of plans designed for small businesses offering retirement benefits to their employees, including the following: • SEP IRA — Kwame A. Michel, an Atlanta-based accountant who specializes in working with small business clients, noted in a recent Inc. article that the SEP IRA is the most popular retirement savings option among his small business clients. “The low fees, combined with a minimal administrative burden and lower maintenance requirements, make it a popular option,” he said.

With this plan, separate IRAs are opened for you and all employees. The business then makes tax-deductible contributions into the IRAs, where the funds grow on a tax-deferred basis. Employees can’t make contributions to their SEP accounts — SEPs are 100 percent employer funded.

One of the biggest benefits of SEPs is the high annual contribution limits. For tax year 2019, businesses can contribute up to $56,000 or 25 percent of annual compensation (whichever is less) to employees’ SEP accounts, including their own SEP. The same percentage of compensation must be contributed to all accounts, but this percentage can be changed each year based on the company’s profitability.

• SIMPLE IRA — This type of plan is similar to a SEP but with some key differences. The biggest difference is that employees can make contributions to their accounts on a salary-deferral basis, which could lower their current-year income taxes. However, the annual contribution limit for SIMPLE IRAs is much lower than the limit for SEPs. For tax year 2019, total SIMPLE IRA contributions are limited to $13,000, or $16,000 for employees who are age 50 or over.

Like SEP contributions, the money your business contributes to employees’ SIMPLE IRAs is 100 percent vested immediately. This means that they can take all of their savings with them if they are fired or leave your company voluntarily.

• SIMPLE 401(k) — These are similar to traditional 401(k)s but without many of the costly and complex recordkeeping requirements and non-discrimination rules. Your business can match employees’ contributions on a percentage basis if you choose, but you’re not required to. For tax year 2019, the annual elective deferral limit for SIMPLE 401(k)s is $19,000, or $25,000 for employees who are age 50 or over.

No More Excuses

With the new Final Rule designed to widen accessibility to MEPs and the other plans designed specifically for small businesses offering retirement plans, there’s no longer any excuse for not offering a retirement plan to employees — no matter how small your business is.

Spend some time researching these retirement plan options and discuss them with your tax professional to determine which one might be best for your business and your employees.