Evolving Your Small Business Retirement Plan: From SEP or SIMPLE IRA to a 401(k)
If you're considering evolving your small business’s retirement plan from a SEP or SIMPLE IRA to a 401(k), you're not alone. Many small businesses start with SEP or SIMPLE IRAs due to their simplicity and low cost, but as your business grows, transitioning to a 401(k) can offer enhanced benefits for both you and your employees. Let's explore why this evolution might be the right move for you.
When you first set up your retirement plan, a SEP (Simplified Employee Pension) or SIMPLE (Savings Incentive Match Plan for Employees) IRA likely made sense. These plans are straightforward, cost-effective, and have minimal administrative burdens. They provide an easy way to start offering retirement benefits without some of the complexities associated with 401(k) plans. However, as your business and team size expands, your retirement plan needs might evolve as well.
Why Consider Transitioning to a 401(k)?
You Have To: SIMPLE IRAs have a maximum employee population of 100 people. SEP IRAs are Employer Only Contributions. Maybe your staff has grown suddenly, they are asking to save more dollars than you are capable of funding, or saving with their own dollars.
Higher Contribution Limits & Vesting: One of the main advantages of a 401(k) over SEP or SIMPLE IRAs is the higher contribution limits. In 2024, employees can contribute up to $23,000 (or $30,500 if they're 50 or older) to their 401(k). Employers can also make additional contributions, allowing for significant retirement savings, but are not required to, like with SEP and SIMPLE IRAs. Additionally, vesting schedules can encourage tenure at an organization. Both the SEP and SIMPLE IRAs require immediate vesting of employer contributed dollars.
Richer Benefits and Features: 401(k) plans offer more flexibility in terms of plan design. Features like Roth contributions, automatic enrollment, and employer matching can enhance the attractiveness of your benefits package, aiding in both recruitment and retention.
Enhanced Employee Engagement: With a 401(k), you can offer more robust investment options and financial wellness programs, helping your employees take a more active role in their retirement planning.
Important Considerations and Deadlines
Transitioning to a 401(k) requires careful planning. Here are some key points to keep in mind:
Engage a Retirement Plan Advisor: If you're not already working with a Retirement Plan Advisor, now is the perfect time to engage one. An advisor can provide invaluable expertise in plan design, compliance, and investment options. They can help you navigate the complexities of setting up a 401(k), ensuring that your plan meets regulatory requirements and aligns with your company's goals. Having a dedicated advisor can also provide ongoing support, helping you and your employees make the most of your retirement plan.
Timing: If you're transitioning from a SIMPLE IRA, you must do so at the beginning of the next calendar year. Notify your employees about the change by November 2nd of the current year. Beginning in 2024, due to SECURE 2.0, a SIMPLE IRA can now be replaced mid-year with a safe harbor 401(k) plan. Transitioning from a SEP IRA to a 401(k) plan does not have the same timing considerations and can be done at most times of the year. Your prior financial institution needs to be informed that contributions are ending.
Administrative Setup: Setting up a 401(k) involves more administration than SEP or SIMPLE IRAs. Partnering with a knowledgeable plan provider or advisor can help streamline this process.
Plan Design: Consider what features and benefits are most important to your business and employees. Customizing your 401(k) to align with your company's goals can maximize its effectiveness.
Things of Note:
Compliance and Testing: 401(k) plans are subject to annual nondiscrimination testing to ensure they benefit all employees fairly. Understanding these requirements is crucial to maintaining compliance, your Advisor, Recordkeeper, or TPA teams can help!
Costs: While 401(k) plans can be more expensive to administer, the long-term benefits for your business and employees often outweigh the initial costs. Work with your Advisor to research potential providers to find the best fit for your needs and budget.
Evolving your retirement plan from a SEP or SIMPLE IRA to a 401(k) can provide substantial benefits as your business grows. By carefully considering the timing, setup, and features of your new plan, and engaging a retirement plan advisor, you can offer a more robust retirement solution that supports your employees' financial futures. If you're ready to take the next step, let's start the conversation and explore how a 401(k) can fit into your business's goals, email us today, Christina.Tunison@lpl.com.
This information is not intended as authoritative guidance or tax or legal advice. You should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.
#600999 May2024