Providing a Small Business Pension Plan

Small Business

Providing a Small Business Pension Plan

Updated on December 02, 2019


Creating pension plans for your employees might be a smart move as a small business owner. Let’s explore some reasons why a small business pension plan could be beneficial to both you and your employees.

What are small business pension plans?

Pension plans are retirement plans in which an employer contributes to employees’ retirement funds, according to Investopedia. Usually, they promise a specific amount of benefits at retirement.

  • There are Defined Benefit Plans where a certain amount of money is guaranteed for retirement, usually based on income earned and years of service—this is probably what you think of as a more traditional pension in which the employee is guaranteed a defined amount of monthly income after retirement.
  • Another type of retirement plan is a Defined Contribution Plan, like a 401k, in which the employer can match a percentage of what the employee puts into to a fund that is invested, and the returns on those investments are used for an employee’s retirement. This plan may rely more on the employee making choices about contributing and investing wisely.

Creating pension plans for the employees of your small business has certain benefits that might be worth the cost. Let’s look at the pros and cons of creating pension plans, and the different options out there for choosing a small business pension plan.

Creating pension plans could help you as well as your employees

The benefit of a small business pension plan is clear for employees—they’ll have a retirement to lean back on once they are done working. But did you know there might be benefits to you as the employer as well?

  • Recruiting good workers. If you want to attract the top talent to your small business, including benefits like a small business pension plan may help. AARP reports that nine out of ten Americans believe everyone should have a pension plan. And a skilled worker with a desirable skillset has the luxury to wait for a job that does offer that benefit.
  • Lowering employee turnover. Losing employees and having to re-hire is neither cost-effective nor productive for a small business. If you offer employees what they need to be well covered, they might be more likely to stick with your small business.
  • Keeping employees motivated. Cultivating a feeling of support with a small business pension plan may give your employees reason to stay motivated. Since some pension plans may even be based on the employee’s salary while working, your employees might be encouraged to perform well and earn more throughout their career.

Tax benefits: all the more reason for a small business pension plan

You may be eligible for a tax credit for establishing a qualified retirement plan to offer to your employees. This could help offset the cost of creating pension plans for employees.

Talk to your accountant or a tax specialist to discuss your options for saving on taxes by offering a small business pension plan.

What’s the difference between qualified and non-qualified pension plans?

There are plenty of different types of small business pension plans to choose from when creating a pension plan, such as the “defined benefits plan” and “defined contribution plan.” But another distinction is whether the plan is qualified or unqualified.

Qualified plans, such as a 401k, let you take a tax deduction when you’re still contributing to the plan, according to Investopedia. So when employees retire and start using their pension plans, they will be taxed on the money that comes from it.

Non-qualified plans are funds made up of after-tax money, reports Investopedia. A Certificate of Deposit (CD) is one example of a non-qualified plan. When the employee retires and withdraws the funds from the small business pension plan, it will not be taxed again.

Pros and cons of a small business pension plan

Pros. The nice thing about a pension plan is that it gives employees some type of financial support after they are retired. From the employer’s perspective, it might create a positive work experience that attracts quality employees.

Cons. Pension plans could require the employer to shoulder a lot of the responsibility of funding retirement for employees, depending on what type of plan you choose. But there are also other options out there, such as Defined Contribution Plans, so that your employees aren’t left completely without retirement savings if you can’t afford to provide a Defined Benefit Pension plan.

Creating a pension plan for your employees is up to you. You might find that there are plenty of benefits to offset the cost to your business, including motivation and loyalty of your employees.

This article is only for general information and is not tax or legal advice. Consult your tax or legal adviser for guidance.

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