Adding a retirement benefits plan for employees is an exciting milestone in a company’s growth cycle. The advantages of offering a plan include employee retention, satisfaction, substantial tax savings, and meeting financial goals for the owners, staff and the company.
However, before your organization implements a new retirement plan, all stakeholders should be aware of the costs, liabilities and workload associated with managing it. Retirement plans today are subject to numerous compliance concerns, so employers must take even more precautions to keep up with the latest industry regulations.
“Increased government scrutiny of benefit plan accounts has emerged over the last several years, but it’s yet to be determined what effect it will have on the popularity of retirement plans,” says Mike Spickard, CEO and Chief Actuary of Tegrit Group. Smart Business spoke with Spickard about when to consider adding a retirement benefits plan for your business and how to choose the best plan.
What are the advantages of implementing a retirement plan for employees?
Providing a retirement plan can help you attract and retain valued employees, assist in the deferral of taxes, and help employees better prepare for retirement. Despite the market volatility, retirement plans are a very popular employee benefit because everyone wants to avoid paying taxes. Employees like to see their retirement accounts grow.
When should companies consider adding a plan?
Your company is ready when either you or your employees are concerned about reducing taxes or saving for retirement, and you have cash available to fund a plan. When your company is new and it’s all about survival and growing into viability, a retirement plan won’t likely be high on your priority list.
When you reach the point where the company, owners and employees are starting to take home more taxable income, you may not need to pour money back into the business to survive. At this point, it is a good time to start thinking about an efficient vehicle to reduce your tax burden.
Once you have decided to add a plan, what are the first steps in the process?
The first step is to develop a budget and determine how much you can afford to spend on administrative costs and employer contributions. If you set up a plan and you are unable to fund it, or you are not able to cover the costs to administer and maintain an attractive benefits plan, then it does not make sense to sponsor a plan yet. We’ve seen cases where companies adopted a retirement plan too early.
The next step is to engage a small cross section of employees to see what type of plan is most useful for them within the budgeted constraints. The last ‘first step’ is to talk to a trusted adviser, including a CPA, financial adviser or attorney who can help you find a qualified TPA (third party administrator).
What plans are popular in today’s business climate?
The most popular plan type today by far is a 401(k) plan with a matching contribution. More than 500,000 businesses in the United States sponsor this type of plan, which involves tax-deferred contributions by employees and usually some form of employer contribution — either a contribution that matches some or all of the employee’s contribution, and/or a discretionary ‘profit sharing’ contribution.
The fastest-growing plan type is a cash balance plan, which allows for much annual larger tax-deductible contributions. It is a more complex plan type, but the larger tax benefits have made it quite popular in a lot of small business circles right now.
Does every employee need to be included in the plan?
Retirement plans offer a lot of flexibility when determining who is eligible to participate. For example, you can set a minimum threshold of hours worked so that employees would have to work at least 1,000 hours in their first year in order to participate. You can go even further and exclude or include certain classes of employees. For instance, a law firm could exclude associates, or a grocery store could exclude baggers.
A retirement plan is less ideal for very low-margin businesses and those that hire transient workers because the tax benefits won’t be as great and the administrative costs will be higher when processing small payments for these types of workers.
What are some tips to maximize a new retirement plan?
Properly design a plan that reaches your present goals and communicate it well and often to your employees. The engagement of qualified, experienced retirement plan professionals is almost always required to get the most bang for your buck in terms of plan design and communication.
Because of their significant tax benefits, retirement plans are heavily regulated. Staying in compliance can be a difficult task, and that is where the engagement of retirement plan professionals and consultants can be very useful.
If you select a less complex plan, it will be easier to administer, and thus, you may not need to engage a retirement plan expert or pension plan actuary. But if you want simplicity, you’re going to have to live with a lower value benefit.
The more complex your plan is, the more capability you will have to take full advantage of the laws, regulations and tax deduction benefits.
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