Change the Game With a Retirement Plan
Attracting and keeping valuable talent is only one of many benefits.
Retirement plans are a must-have for recruiting and retaining employees and helping you stand out in the competitive labor market, but there are a lot of choices. Some plans cost very little to set up and maintain, and nearly all offer tax deductions for contributions made by the business. The SECURE Act added a few new monetary incentives for business owners to set up retirement plans as well – including a $500 tax credit when you set up automatic enrollment and a potential credit of up to $5,000 for setting up a plan.
Who contributes, compensation limits, tax benefits, fees, the size of your business and payroll deductions are all important factors in weighing what kind of plan to design and offer. Talk to your advisor about leveling up not only your own retirement planning, but your employees’ too.
So what are the options? Let’s take a look.
First, some changes in types of plans available were also implemented with the SECURE Act, the most important being pooled employer plans (PEP). These plans are great for small businesses because they allow you to pool your plans with other businesses to reduce administrative and cost burdens, and allow you access to plans you may not otherwise have access to.
Multiple employer plans
(MEP) were available pre-SECURE Act, but now these have loosened restrictions, again making it easier for small businesses to come together to offer plans for their employees. Most notably, the “one bad apple rule,” which penalized an entire MEP if one business had a compliance or qualification issue, is now gone. Something else to keep in mind when designing your plan: The SECURE Act now requires that, in a defined contribution plan, businesses must deliver a lifetime income disclosure to participants at least once every 12 months.
Simplified employee pension (SEP) IRA
The SEP plan is funded solely by you, the employer, but each employee opens an IRA and chooses their own investments. There are minimal startup and operating expenses, and contributions are 100% vested right away. You retain discretionary control over the amount of annual contributions (up to 25% of an individual’s compensation), but you must make contributions for all employees over 21 years old who have worked for the business and earned at least $650 in three of the preceding five years.
The contributions are tax deductible for the company, and all earnings grow tax-deferred until the participants withdraw them. As the business owner, you can’t allot a higher percentage for yourself than you do for your employees.
Research by The Pew Charitable Trusts shows when an employer offers a retirement plan, 52% of millennials, 75% of Gen Xers and 80% of baby boomers will enroll. What’s more, employee participation – for workers of all ages – rises nearly 16% when an employer match is offered.
The SIMPLE (Savings Incentive Match Plan for Employees) is affordable and easy to set up for businesses with fewer than 100 employees, with minimal ongoing maintenance expenses.
Each employee can defer up to $13,500; $16,500 if age 50 or older (2021). The business is required to make matching dollar-for-dollar contributions on the first 3% of employee elective deferrals, or a uniform 2% contribution to all employees, regardless of whether they elect to contribute.
And like the SEP, all contributions are tax deductible. However, be aware that with the SIMPLE IRA, participants who take an early withdrawal within the first two years of the account’s inception could be subject to a penalty as high as 25% of the account withdrawal.
401(K) profit-sharing plan
A 401(k) profit-sharing plan comprises both employee salary deferrals and matching employer contributions. Typically, plan participants select their own individual asset allocation from a variety of investments, including a Roth option, which allows for either pretax or after-tax salary deferrals, respectively.
The business also can make profit-sharing contributions among all eligible participants, but doesn’t have to contribute in years when profits are low – it’s completely up to your discretion.
Also note that you can use an age-weighted method, in which older employees or those who have worked for you the longest receive a proportionately larger share of the contribution. A third-party administrator can help you design the plan.
Employee stock ownership plan (ESOP)
An ESOP is set up via a trust fund through your company to make annual contributions to individual employee accounts, which are used to buy company stock. Or your company can issue new shares to an ESOP, deducting their value (for up to 25% of covered pay) from taxable income. Employers can match employee contributions with company stock, which may be worth more than a matching cash contribution. The stock is typically subject to a vesting schedule, and employees pay no tax on the contributions until they receive the stock when they leave or retire.
With a post-COVID-19 job market and workers’ desires to fund fulfilling retirements, you may want to consider offering employees this benefit sooner rather than later. Your advisor can walk you through what makes sense for your business.
-Review the plans you currently have in place – is there an opportunity to amend your plan?
-See if the SECURE Act opens up plan options to boost your employees’ retirements
-Reach out to your advisor to find out more about plans that make sense for your -business
Sources: forbes.com; forbes.com; hbr.org; pewtrusts.org; irs.gov; raymondjames.com