How you can make retirement plans work for your SMB

Written by The Peppermint Team

Peppermint was created by a group of business owners, entrepreneurs, and benefits experts who have been on both sides of the table as employees and employers.

March 30, 2022

Have you thought about offering retirement plans for your employees, but weren’t sure if you could afford to – in time or money?

Retirement plans, particularly 401ks, can be complicated. It’s easy to get overwhelmed by the technical wording and variety of options to choose from. 

The recent creation of Pooled Employer Plans (PEPs) makes setting up retirement plans a lot simpler. PEPs allow businesses to pool their resources, meaning it is more affordable than ever for a business of any size to help their employees save for the future. 

Plus, thanks to tax credits that small- to medium-sized businesses can receive just for signing up for a PEP (and selecting automatic enrollment), retirement plans may be closer in reach than you thought! 

A retirement plan is a great asset to add to your compensation package to help reel in new talent and increase overall employee satisfaction. By offering a retirement plan, you show that you not only care about your employees’ future with the company, but also after their time with the company comes to an end. 

There are too many advantages to offering a retirement plan to let complicated wording be the reason you don’t. In this article, we’ll go over some key terms to know when researching plans, what a 401k is, advantages of a PEP, and how to tailor your plan to your SMB’s needs, as well as the tax credits you could be eligible for to help offset the costs. 

Simplifying technical terms

There are a couple of complicated ideas that come up when looking at retirement plans. These are the top five terms that you’ll encounter: highly compensated employees (HCEs), vesting plans, nondiscrimination testing, safe harbor plans, and automatic enrollment. 

Highly Compensated Employees (HCEs)

Defined by the IRS as an individual who owns more than 5% of interest in the business during the year or the preceding year, regardless of compensation, or someone who made more than $130,000 in 2020/2021 (this number will vary depending on the year). This term is often brought up when discussing nondiscrimination testing and eligibility for tax credits. 

Vesting Plans 

You’ll most likely hear about vesting plans when talking about employer matching. Offering employer matching means matching your employees’ contributions to their retirement fund. It’s a really great tool to encourage your employees to join the plan. 

Vesting plans allow you to decide when those funds are fully awarded to employees and can be used to reward loyalty to long-time employees. 

This option is available with peppermint’s Discretionary plan. 

Nondiscrimination Testing 

This is testing that is conducted to ensure contributions aren’t top-heavy, meaning that everyone, no matter their position or compensation, is able to contribute roughly the same percentage to their retirement fund. If any key employees are found to be contributing more than 60% to their plan, costly corrective action may be required. 

Only peppermint’s Discretionary option is subject to nondiscrimination testing. 

Safe Harbor Plans 

These types of plans ensure that you’re fulfilling all government requirements, so you aren’t stuck with costly fines. The catch is that any employer matching is automatically fully vested, meaning that if an employee chooses to leave at any point, they can take the full amount of employer contributions to their retirement plan with them. 

However, doing so allows you to skip nondiscrimination testing, which can be costly and require additional administrative work. Avoiding the fees from both testing and potential fines can make this a great option for SMB owners. 

Safe harbor plans are available with peppermint’s Dollar for Dollar or Fixed 3% options. 

Automatic Enrollment

Rather than opting-in to a plan, automatic enrollment registers all employees into the retirement plan and requires those who do not wish to participate to consider what they may be missing out on. This can boost participation rates while ensuring that everyone has a fair chance to reap the benefits that come with joining a retirement plan.

All the options offered by peppermint can include automatic enrollment. 

What is a 401k, and why is it so popular?

There’s a reason when you think retirement plans, one of the first things to come to mind is a 401k. In 2020, approximately 60 million Americans were participating in nearly 600,000 401k plans. But it wasn’t always that way. 401ks only came to be in the 1980s when they quickly replaced their pension predecessor. 

Before 401ks…

There were pension plans. The original retirement plan placed the risk and burden of contributing to the plan solely on the employer. 

With the introduction of 401ks in 1978, the burden was placed on the employee to contribute to the plan. This ended up being a win-win for employers and employees, as this plan gave employees the ability to defer compensation in a tax-advantaged way as well as be able to invest those funds to grow their nest egg. 

Making 401ks accessible for SMBs

Prior to the creation of Pooled Employer Plans, only big corporations and companies were able to offer 401ks due to their complex nature and often high start-up costs. 

With the passing of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in 2019, that all changed. 

Before, businesses had to have something in common, such as working in the same industry, in order to combine their resources towards a plan referred to as Multiple Employer Plans. Now, under a single provider, businesses without any relation can pool their resources to reduce the overall costs of administrative fees and the risk they take on. 

The Pooled Plan Provider (PPP) takes on the majority of the administrative duties of filling out forms, helping with nondiscrimination testing and finding other businesses to join the pool, significantly reducing the stress that can often be associated with offering a traditional 401k.

The Path to PEP

If you decide that a Pooled Employer Plan might be the right direction for your SMB, the next step is looking into Pooled Plan Providers. Choosing the right PPP is the most important step in the process of offering a Pooled Employer Plan, since they play such a big role in how you are able to administer the plan and the behind-the-scenes work involved. 

Tailoring a plan to your needs 

Different pooled plan providers will have different options for how you can administer the plan. Here at peppermint, we offer three different compensation options to select from: dollar for dollar, fixed 3%, and discretionary. 

All of our plans come with the following base features:

  • Profit sharing options
  • Funds invested in retirement plans before being taxed
  • Ability to transfer funds from prior retirement accounts
  • Flexible eligibility for enrollment
  • Automatic enrollment options
  • Access to borrow from retirement accounts
  • Ability to withdraw funds in an emergency
  • Reduce an employer’s taxable income

Dollar for dollar: allows both the employer and participants to maximize their contributions to their funds through employer matching–100% on the first 4% of deferred compensation. 

Fixed 3%: ensures that all employees receive retirement benefits by automatically putting 3% of their compensation into the fund. 

Discretionary: gives the employer the ability to adjust contributions as business needs change through vesting schedules, but is subject to nondiscrimination testing (an additional $1000 annually).

All three options have their advantages and disadvantages, depending on the needs of your business. If you aren’t sure which option might be right for your SMB, you can check out our in-depth guide or talk with one of our experts

How your PEP could (partially) pay for itself 

Pooled Employer Plans are already a more affordable way to offer a 401k, but you could also be eligible for additional savings through tax credits just by signing up and choosing automatic enrollment.

It’s important to note that unlike a tax deductible, a tax credit reduces the amount of taxes owed on a dollar-for-dollar basis, saving you a significant amount of money. 

The credit covers 50% of any and all eligible startup costs, at least $500 or $250 multiplied by the number of non-HCEs who are eligible to participate in the plan, up to $5,000. 

Those who choose to add automatic enrollment to their plan receive an additional $500 in tax credits.

Both of these credits can be claimed for the first three years of the plan. When all is said and done, over the course of three years start-up tax credits could total upwards of $15,000 and automatic enrollment could amount to as much as $1,500.

Check out our free tax credit calculator for an estimate of just how much your SMB could save!

Who qualifies for tax credits?

Most small businesses employing 100 or fewer people with at least one non-HCE participating will qualify for the credit. 

If your business meets the requirements for the tax credit, the next step is filling out Form 8881. 

You can find and download Form 8881 (Credit for Small Employer Pension Plan Start-Up Costs) through the IRS to calculate and report your tax credit. 

The form is broken up into two parts, with the first calculating the start-up costs credit and the second adding on for automatic enrollment if applicable.

From there, the form will let you know what form to fill out next in order to report the credit, which will depend on the structure of your business. 

For partnerships and S corporations, the IRS directs you to report the final number on Schedule K, and for all other businesses to report on Form 3800 for General Business Credit in Part III on line 1 of the form. 

Note that your business may save more by taking the retirement plan start-up fees out as regular business expenses rather than claiming it on Form 8881. It’s not possible to do both though, so make sure you choose the option best suited to your situation.

Within Reach

Adding a retirement plan to your compensation package can make a real difference in attracting talent and boosting loyalty and overall satisfaction within your workforce. With the creation of Pooled Employer Plans, the most popular type of retirement plan, a 401k, is within reach for businesses of any size. 

With all the potential benefits, it’s worth the investment. Talk to one of our advisors today to see if a PEP is right for your business. 

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