Planning for Retirement: With Employees vs. Without

The size of your workforce can significantly influence how you plan for retirement as a business owner. If you have no employees, your main focus is maximizing contributions to your own account. But once you bring employees on board, you need to consider offering them retirement benefits as well, along with complying with federal regulations.

This shift not only changes the administrative load but also opens opportunities to strengthen your team’s loyalty.

Why Employees Impact Retirement Plan Selection

Without Employees:

• You can opt for a Solo 401(k) or a SEP IRA. These plans allow for relatively high contribution limits with minimal reporting requirements. Often the only people working within your organization are contractors and freelancers.

• You don’t need to provide matching contributions or comply with nondiscrimination tests designed to protect employees’ retirement equity.

With Employees:

• Traditional 401(k) plans or SIMPLE IRAs often come into play.

• Regulations may require annual testing to ensure fairness.

• You might choose to match a percentage of employee contributions, which can affect your budget but also serves as a retention tool.

Part One: Planning Without Employees

1. Simplicity and High Limits
   Without employees, a Solo 401(k) can be extremely beneficial. You can contribute as both an employee and employer, potentially reaching significant annual amounts. For instance, if your business sees a profitable year, you can supercharge your retirement savings without worrying about matching staff contributions.

2. Minimal Paperwork
   In many cases, you only file a short Form 5500EZ once your plan balance exceeds $250,000. Until then, your responsibilities are fairly light. This simplicity helps you concentrate on business growth rather than administrative tasks.

3. Ability to Adapt
   If your income fluctuates, you have the freedom to adjust contributions as needed. A freelance writer who experiences seasonal demand might contribute heavily after big projects and scale down during slower periods, all without affecting anyone else’s accounts even if hiring other contractors to help carry the profits forward.

Part Two: Planning With Employees

1. Compliance and Testing
   A Traditional 401(k) offered to employees comes with annual nondiscrimination tests. These tests verify that highly compensated employees (including you, as the owner) aren’t benefiting disproportionately compared to lower-paid workers. Failing these tests can result in forced refunds of contributions.

2. Employee Retention and Morale
   While the added complexity can be challenging, providing a retirement plan is often seen as a significant perk. It encourages employees to stay longer, reduces turnover, and can enhance overall morale. Some businesses find that a Safe Harbor 401(k) automatically meets certain testing requirements if they provide a minimum employer match or nonelective contribution.

3. Cost-Benefit Considerations
   Offering a group retirement plan does cost more in administrative fees and potential employer matches. On the other hand, it may lead to better talent acquisition and loyalty. A small tech startup, for example, might decide that offering a robust 401(k) plan helps attract engineers who value strong benefits as much as competitive salaries.

Balancing Personal and Employee Needs

One of the challenges business owners face is balancing their own desire for high contributions with the requirement to provide equitable benefits to employees.

To navigate this, you can:

• Opt for a Safe Harbor provision in your 401(k), ensuring that contributions are immediately vested and that all participants benefit.

• Work with a third-party administrator (TPA) to design a plan that accommodates your business’s budget while remaining attractive to employees.

Example: A Growing Marketing Agency

Consider a scenario where you started as a solo marketing consultant and used a Solo 401(k) for three years. As your client base expanded, you hired a small team of four employees.

Maintaining a Solo 401(k) is no longer permissible once you have eligible employees, so you transition to a Traditional 401(k) plan with a small matching contribution.

While your annual administrative tasks and costs increase, you find that employees are more engaged and appreciative of the benefit, and you can still make healthy contributions for yourself. In the end, your workforce’s satisfaction—and the retention that comes with it—can outweigh the added complexity.

Adapting Over Time

Retirement planning doesn’t remain motionless. As your business evolves—adding new employees instead of contractors and freelancers, changing profit margins, or even pivoting industries—you may find that your chosen plan needs an overhaul.

Revisiting your plan every year or two ensures it continues to meet both your personal retirement objectives and your team’s needs.

Making the Right Choice

The best retirement plan for your business depends on factors like:

• Number of employees (if any).

• Budget for employer contributions.

• Administrative resources available for compliance tasks.

• Long-term growth projections for your business.

By understanding how having (or not having) employees shapes your choices, you can create a retirement plan that aligns with your business model and sets you up for financial security.

Your strategy will differ substantially depending on whether you’re planning a solo future or you have a dedicated team relying on you for benefits. If you remain a one-person operation, the simplicity and high contribution possibilities of a Solo 401(k) or SEP IRA might be ideal.

But, if you employ staff, the added administrative steps and potential costs of a Traditional 401(k) or SIMPLE IRA might be balanced by stronger retention and a happier team.

Thinking through these trade-offs today positions you to offer the right retirement benefits for your situation—while still safeguarding your future.