Retirement Plan Options: MERIT vs Others

As a small business owner or HR professional, you’re likely familiar with the importance of offering retirement savings options to your employees. Whether you’re just starting to think about implementing a plan or are exploring your options, understanding the differences between your options is crucial.  In this article, we will take a look at a few retirement plan options for small businesses in Maine. Specially, we will compare Maine’s state-run retirement program, MERIT, and other popular retirement plans like 401(k)s and SIMPLE IRAs. By the end, you should have a better understanding of what MERIT is and how it is different from other retirement plans. Let’s get started.

What are some retirement plan options for small businesses?

When it comes to retirement plans for small businesses, there are several options to consider. The right plan for your business depends on factors such as the number of employees, their retirement goals, and your business’s budget.

Employer-Sponsored Plans

These plans are typically set up and managed by the employer, allowing both employers and employees to contribute to the retirement savings. Employer-sponsored plans often include matching contributions from the employer, which can help with employee retention. Some common types of employer-sponsored plans include:

• 401(k): A popular retirement plan that allows both employee and employer contributions. It provides flexibility and higher contribution limits.
• 403(b): Similar to a 401(k), but typically used by non-profit organizations and public-sector employees.
• 457(b): A retirement plan for government employees and certain non-profit workers, offering tax-deferred growth.
• Roth IRA: A retirement account that is funded with after-tax dollars. Contributions grow tax-free, and qualified withdrawals in retirement are tax-free as well.
• SIMPLE IRA: A tax-deferred account that allows employees to contribute pre-tax dollars, reducing taxable income in the current year. Taxes are paid when the money is withdrawn in retirement.

State-Sponsored Plans

Some states, like Maine, have introduced state-run retirement plans for small businesses that are easy to implement and require little administrative work from the employer. The plan is managed by a state run organization. These plans typically offer basic savings options and make it easy for employees to start saving. An example is:

• MERIT (Maine Retirement Investment Trust): Maine’s state-run program provides a simple Roth IRA for employees.

Each of these options can help small businesses provide a valuable benefit to their employees while also supporting retirement savings. The key is to choose a plan that aligns with your business and employees’ needs.

How do these retirement plan options compare?

Let’s compare MERIT versus two of the most common plans, the Traditional 401(k) and the SIMPLE IRA.

What is MERIT?

Maine’s state retirement program, known as MERIT (Maine Retirement Investment Trust), is designed to help small businesses meet the requirement of offering a retirement plan to employees. MERIT mandates that all employers with five or more employees in Maine must either offer a tax-qualified employer-sponsored retirement plan or enroll their employees in the state-run program. The state plan operates as a Roth IRA. With a Roth IRA, contributions are made after-tax, meaning employees won’t pay taxes on the funds when they withdraw them in retirement. However, the tradeoff is that there are no current-day tax savings for employees.

• Automatic Enrollment: Once registered, employees will be automatically enrolled in MERIT, with a default contribution rate of 5% of their salary. Employees can change this percentage or opt-out completely within 30 days of being enrolled. Employees may be reenrolled at ad-hoc intervals.
• Employee Control: Employees can log in to their account to adjust contribution amounts, select their investment types, or opt-out entirely. The program is designed to be flexible, but employees must actively manage their account if they wish to change contributions or opt-out.
• Account Ownership: The MERIT Roth IRA is tied to the individual, not the employer. This means that if an employee changes jobs, the account and its contributions remain with them.
• No Employer Contributions: One significant limitation of MERIT is that employers are not allowed to contribute or match employee contributions. Employers simply facilitate the plan by enrolling their employees and ensuring contributions are deducted from payroll.
• Income Restrictions: If an employee earns more than $146,000 annually, they cannot contribute to the MERIT Roth IRA. This income restriction is something businesses need to be aware of when offering the plan.
• No Customization for Employers: MERIT is a one-size-fits-all plan with no option for employers to customize eligibility rules or contribution formulas. Unlike other retirement plans, businesses cannot tailor the program to meet their specific needs.
• Contribution Limit: For 2025, the maximum amount that savers can contribute to their MERIT account is $7,000 or $8,000 if over 50 years of age.

What is a SIMPLE IRA?

A SIMPLE (Savings Incentive Match Plan for Employees) IRA is a great retirement plan for small businesses as it offers more flexibility. Only businesses with under 100 employees are eligible to operate a SIMPLE IRA.

• Contribution Limits: In 2025, employees can contribute up to $16,500 to a SIMPLE IRA, with an additional $3,500 catch-up contribution for employees aged 50-59 or 64+. For those 60-63, the catch-up limit is $5,250.
• Employer Contributions: Employers must match employee contributions dollar-for-dollar up to 3% of an employee’s salary, or they can make a non-elective contribution of 2% of each eligible employee’s salary, regardless of whether the employee contributes.
• Eligibility Rules: SIMPLE IRAs have basic eligibility rules, but employers can set these criteria. For example, you can require employees to have worked a certain number of hours before they are eligible to participate.
• Plan Management: SIMPLE IRAs have a low administrative burden on employers. These plans do not carry certain testing or reporting requirements, making them appealing to small businesses.

What is a Traditional 401(k)?

For businesses looking for a highly customizable plan, a 401(k) might be the best option. It offers greater flexibility and higher contribution limits than both MERIT and SIMPLE IRAs.

• Contribution Limits: In 2025, employees can contribute up to $23,500 to a 401(k), with an additional $7,500 catch-up contribution for employees aged 50-59 or 64+. For those 60-63, the catch-up limit is $11,250.
• Employer Contributions: Employers do not have to but can match contributions or even set up profit-sharing arrangements. This is a significant advantage for businesses looking to attract and retain employees.
• Customizability: 401(k) plans offer a high level of customization, allowing businesses to set up profit-sharing, vesting schedules, and eligibility rules. This flexibility is ideal for larger businesses or those with complex needs.
• Plan Management: 401(k)s do come with more administrative burden, paperwork requirements, and testing for businesses than some other types of plans. For this reason, a 3(16) fiduciary is key in helping manage the plan.

Which retirement plan option is right for your business?

Choosing the right retirement plan for your business depends on several factors, including the size of your workforce, your budget, and the level of flexibility you need. MERIT is a good option for businesses just getting started with offering retirement benefits, especially if you have fewer than 15 employees and are looking for a low-cost, low-maintenance option.

However, if you’re looking to provide higher contribution limits, employer matching, or more flexibility, a SIMPLE IRA or 401(k) might be a better fit. Both of these options offer more opportunities for employees to save and allow employers to contribute, which can be a valuable tool for employee retention.

Take time to evaluate your business’s needs and speak with a retirement plan expert to find the best solution for your employees. Feel free to contact our team for additional information!