When it comes to selecting a retirement plan for your company, there are various options to consider. Some of the most common offerings include 401(k) plans, 403(b) plans, Simple IRAs, SEP plans, Profit Sharing Plans (PSPs), and Employee Stock Option Plans (ESOP).
Each of these plans has various benefits for both the employer and employees, but often the best choice for your company will depend on a variety of factors, including the company’s size and the cost of administering the plan.
As you review the options, remember that offering a competitive benefits package—one that includes a retirement plan—is an essential tool for attracting and retaining talent. Job seekers place significant value on retirement plans, particularly those that include matching contributions from employers, according to the non-profit Transamerica Institute and its Transamerica Center for Retirement Studies (TCRS).
Here’s a closer look at five of the most common retirement plans offered by employers and some of their key benefits and features.
401(k)
A 401(k) retirement plan is the most common option available to employees in the United States. Fifty-two percent of employers offer their employees a 401(k) or a similar employee-funded retirement plan, according to a survey conducted in late 2020 by Transamerica Institute and its Transamerica Center for Retirement Studies (TCRS).
For employers, 401(k) plans can be low-cost, easy to establish, and offer a great deal of flexibility. 401(k)s can be suitable for small businesses and large corporations alike, and offer optionality for employers, in terms of eligibility, plan features, and investment options.These plans involve employees making ongoing payroll contributions to a defined benefit retirement account. The employer is responsible for taking care of the administrative work, including deducting contributions from employee paychecks and directing the money to 401(k) accounts.
Employers who provide matching 401(k) contributions to employees’ accounts qualify for tax deductions. Employees, meanwhile, are able to make pre-tax contributions from paychecks. The contributions reduce the employees’ annual taxable income, and the money contributed to 401(k) accounts, which is invested in stocks, bonds, and mutual funds, is allowed to grow on a tax-deferred basis until withdrawals are made during retirement.
403(b)
A 403(b) plan is similar to a 401(k) plan in many ways. Just like 401(k) accounts, employees can make pre-tax contributions to 403(b) accounts. And the contributions are not subject to federal or state income tax until the money is withdrawn during retirement.
There are few key distinctions for employers, however, with regard to 403(b) plans. Most notably, these accounts are intended for specific types of entities. Generally, that includes non-profit organizations, as well some government employers, schools, universities, and churches.
In addition, 403(b) plans typically feature a more limited range of investment options than 401(k) accounts. In the case of 403(b) accounts, participants are generally able to invest in annuities and mutual funds.
And one more notable difference for employers, when implementing a 403(b) retirement program, matching contributions are typically not included.
SIMPLE IRAs
Simple IRAs (also known as Savings Incentive Match Plans) allow employees and employers to contribute to a traditional Individual Retirement Account (IRA). They offer a straightforward, easy-to-administer option that does not involve the start-up and operating costs of a conventional retirement plan—making them particularly suited for smaller employers. Often SIMPLE IRAs are offered by companies that have 100 or fewer employees.
“It is ideally suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan,” the IRS says of SIMPLE IRAs.
Employers who offer SIMPLE IRAs cannot have any other retirement plans in place, and making them even more attractive for particularly small businesses, there are not reporting requirements the employer must comply with when providing this type of retirement account.
Similar to a 401(k) and 403(b), employees make contributions to a Simple IRA on a pre-tax basis. This type of retirement plan also allows employers to realize some tax benefits. But while matching employer contributions to a 401(k) program are optional, that’s not the case with Simple IRAs. Employers must provide either a match of up to 3 percent or a 2 percent nonelective contribution for each eligible employee. Another departure from 401(k) plans, employees who are eligible must participate in SIMPLE IRAs—meaning they cannot opt-out.
Equally importantly, SIMPLE IRAs have a much lower annual contribution limit than 401(k) plans of just $15,500 for 2023.
SEP-IRAs
While businesses of any size can establish SEP accounts, according to the IRS, SEPs are a good option for small businesses, particularly those who are self-employed. Like SIMPLE IRAs, they do not have the start-up and operating costs of 401(k) and 403(b) accounts and they do not have reporting requirements, either.
This type of retirement program allows employers to contribute to traditional IRAs established for eligible employees. However, unlike the SIMPLE IRA, only the employer makes contributions to a SEP IRA. The employee does not contribute any money. There are no payroll deductions made by employees or annual contributions of any type.
The IRS allows employers to contribute up to 25 percent of each employee's pay to a SEP IRA. But the amount an employer contributes is flexible– there is no minimum requirement. This particular feature can be helpful for small businesses if cash flow is an issue during the start-up phase.
Profit Sharing Plans (PSPs)
A profit-sharing plan (PSP) is perhaps the most flexible of all the retirement plan options. It is a type of account that allows employers to reward employees based on company performance. The contributions to these accounts are discretionary; there is no fixed amount that is required to be contributed by law, the IRS explains.
“If you can afford to make some amount of contributions to the plan for a particular year, you can do so. Other years, you do not need to make contributions,” explains the IRS. “Also, your business does not need profits to make contributions to a profit-sharing plan.”
Generally, employers make contributions to these types of accounts on a quarterly or annual basis, depending on the profits of the company. When companies do make contributions to PSPs the money must be shared with each employee based on a “formula for determining how the contributions are divided.”
Because PSPs are based on the company’s performance, it is only employers who make contributions to these accounts. Employees do not make payroll contributions.
PSPs can be offered by businesses of any size, and they can be offered even if your company offers other types of retirement account plans as well. But you will have reporting requirements with a PSP. Businesses that offer this type of plan must file a Form 5500 with the IRS annually.
The takeaway
These five types of retirement account plans are just a few of the options to consider. Some of the other choices include Employee Stock Option Plans (ESOPs) and Pooled Employer Plans. If you’re not sure which approach is right for your business, it can be helpful to speak with an advisor who has expertise in retirement plans. In addition, Penelope, offers 401(k) plans that are specifically designed for small businesses. Our plans make the process easy and accessible for businesses of any size.
Interested in retirement plans for your employees? Get started today with a free, no-obligation consultation with a 401(k) retirement specialist.
Penelope Team
Mia Taylor