Yes, the idea of offering retirements plans for your employees sounds appealing, but is it truly important? Are there any advantages as an employer? Setting up a retirement account for your employees may seem like a daunting or expensive task; however, in reality, it can be more beneficial and more affordable than you would think.
The first advantage is that, generally, companies that offer some form of retirement package tend to draw higher-quality employees – ones that want to make a career out of the position, not just treat it as another place to be for a few months. A retirement plan is one of the most-valued employee benefits.
As far as any tax advantages for the employer, there are substantial advantages that could benefit you. Employer contributions to employee retirement plans can be reported as tax deductions. There is also a tax credit available for small businesses that allow you to claim partial credit for the normal operating costs of implementing a SEP, SIMPLE, or other similar-type retirement plans for their employees.
What are your options? What plans are commonly offered to employees by small businesses? Most plans are divided into two main categories: defined-contribution plans and defined benefit pension plans.
A defined-contribution plan has maximum annual contribution limits set up by tax law. Employer contribution amounts are not mandated, allowing you to be a little more flexible during slower years.
The following are the common “defined-contribution” plans:
- SEP (Simplified Employee Pension) IRA – SEP plans have no filing requirements and little to no setup/maintenance costs for the employer.
- SIMPLE IRA – In order to offer a SIMPLE IRA, your business must have fewer than 100 employees. There are set contribution limits for the employee, but there are no filing requirements for the employer.
- 401(k) – This type of retirement plan requires a bit more involvement on the employer’s end. There are annual verifications that must be completed and other qualifications that must be met. However, contributions made by the employer are tax-deductible.
- Profit-Sharing Plan – This type of plan is open to any size business, but is funded through employer-only contributions. However, the law does not require a specific contribution amount, and employers do not have to contribute every year. This plan can be offered in addition to other retirement plans.
It is very simple to set up a SEP or Simple IRA. However, if you tend to have a high turn over of employees, it may be best for you to stick with a corporate profit-sharing plan. With profit sharing plans, you can avoid being made to contribute to retirement funds for short-term employees.
Defined-benefit pension plans have annual contribution limits that are based on a specific goal or “target” level that the employee wants to reach after retirement. Annual contribution limits are calculated based on four factors: number of remaining years until retirement, the estimated rate of return on the investments, the target level of annual benefits, and the current account balance.
Defined-benefit plans are great options for employees who are over the age of 50, are in the higher earning bracket, and are in a hurry to meet their retirement goals. However, the major downside to defined-benefit plans is that annual contributions are mandatory and are not flexible. If you feel your employees need a bit of flexibility with annual contributions, a 401(k) may be a better option.
How to Set it up?
Now that we have discussed the types of plans that you can offer your employees, we need to discuss how to set up your chosen plan. Retirement plans have quite a few details that need to be addressed, so it is always best to contact a retirement plan professional before setting up a plan. Quite often, your bank or business attorney can make some recommendations.
- Pick a plan. Most commonly, small businesses choose to offer SEP accounts, SIMPLE IRAs, and 401k plans. Remember to review the costs related to each type of account, as well as the tax benefits that are offered to your business as a result.
- File your application form (IRS Form 5300) with the IRS.
- Assign a plan administrator. Choose one from recommendations or contact a brokerage firm.
- Inform employees of your eligibility requirements and enrollment periods. Make sure that you or your plan administrator is available to answer any questions they may have.
- File your Annual Report of Employee Benefits (Form 5500) with the IRS, along with Forms 8880 and 8881.
Make sure when selecting a retirement plan for your business, you take all factors into consideration. How close are your employees to retirement age? Can your business afford to contribute annually? A retirement plan professional will be able to walk you through all of your options and help you find the best plan for your needs.