For many business owners, the company is both a livelihood and one of their largest assets. It is also a place where personal and business finances are closely connected. The right retirement plans and benefits can help you save for your own future while attracting, rewarding and retaining the people who help your business grow.
Here is an overview of some of the strategies business owners often consider.
Why benefits matter
In a competitive hiring environment, compensation alone may not be enough. Employees increasingly look at the full package, including retirement plans, insurance and long-term incentives. A thoughtful benefits strategy can help:
- Attract talented people
- Encourage key employees to stay
- Help owners save for retirement with potential tax advantages
- Protect the business from the loss of an essential person
Retirement plan options
There is no one-size-fits-all retirement plan. The right choice depends on the size of your business, your budget, your goals and the needs of your employees. Common options include:
- 401(k) plans: allow employees to contribute from their paychecks, with the option for the employer to add matching or profit-sharing contributions. They are flexible and widely recognized by employees, though they generally involve more administration than simpler plans.
- SEP IRAs: funded by employer contributions and often attractive to self-employed individuals and smaller businesses because of their simplicity. Contributions are generally required to be made for all eligible employees at the same percentage of pay.
- SIMPLE IRAs: designed for smaller employers, allowing employee contributions along with a required employer contribution, with less administration than a 401(k).
Each option has its own contribution limits, eligibility rules and administrative requirements. Reviewing them side by side can help you choose a plan that fits your business today and can adapt as it grows.
Protecting the business: key person coverage
Many businesses depend on a small number of people. If an owner, a top salesperson or a critical manager were suddenly unable to work, the impact on revenue, relationships and operations could be significant.
Key person life insurance is designed to help. The business owns the policy on an essential individual and is the beneficiary. If that person passes away, the proceeds can help cover lost revenue, recruiting costs or debts during a difficult transition.
Rewarding and retaining key employees
Beyond a standard retirement plan, some businesses offer additional benefits to select employees. These strategies, sometimes called "golden handcuffs," are designed to reward key people and give them a reason to stay. Examples include:
- Executive bonus arrangements, in which the business pays for a life insurance policy owned by the employee
- Nonqualified deferred compensation, which allows select employees to defer a portion of income to a future date
- Vesting schedules, which tie benefits to continued service over a period of years
These strategies can be tailored to your goals, but they involve tax, legal and accounting considerations that should be reviewed with your professional advisors.
Connecting business and personal planning
For owners, decisions about the business often affect personal financial goals, and the reverse is also true. A retirement plan for the business may be a central part of your own retirement savings. Key person and buy-sell planning may affect your family's financial security. And the eventual transition of the business may be one of the most important financial events of your life.
Looking at these decisions together helps ensure your business strategy and your personal plan support each other.
Getting started
Whether you are establishing your first retirement plan, reviewing an existing one or looking for ways to retain your best people, a thoughtful review can help clarify your options.