The job market continues to strengthen. This means more jobs competing for fewer workers, and employees looking for greener pastures. To stay competitive, you need to maintain a vibrant culture and competitive benefits – and that includes a retirement savings plan. According to the Transamerica Center’s 18th annual retirement survey, 88% of employees said a 401(k) or similar plan was somewhat to very important. And 81% of workers like the idea of automatic 401(k) plan enrollment. But only 22% of employers provide the latter feature because they think employees will be resistant. Quite a disconnect. But now that you’re armed with the truth, it’s time to explore your retirement plan options. What you find may surprise you.
A shrinking unemployment rate, 3.8% in February 2019 (below market expectations of 3.9%), down from 4% in January, is causing employers to compete harder to attract the best and brightest employees.
First of all, some plans cost very little to set up and maintain. And nearly all plans offer tax deductions for contributions made by the business. So not only do you have the opportunity to help secure your employees’ financial futures, but you can provide some important tax breaks for your company. Here are some of the retirement plan options available.
The SEP plan is funded solely by you, the employer, but each employee opens an IRA and chooses his or her 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 $550 in any 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. Note that, as the business owner, you can’t allot a higher percentage for yourself than you do for your employees.
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 $13,000; $16,000 if age 50 or older (2019). 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 roll money into a new account within the first two years could be subject to a penalty as high as 25% of the account’s balance.
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. 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.
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.
Say Yes to the Vest
Per IRS rules, a 401(k) profit-sharing plan must have a vesting schedule that states an employee’s percent ownership of the employer’s contribution to the fund (employee contributions are 100% employee owned). This schedule can cause an employee to lose significant dollars if he or she leaves an employer before fully vested – which may result in a decision to stay longer. The IRS offers two vesting schedules:
The cliff: No vesting is required before a three-year service maximum. After that time 100% vesting is required.
Graduated vesting: The plan must provide vesting at least as fast as 20% at two years, then increasing each year to 100% by year six.
And employees will participate – 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. Talk to your plan administrator or advisor for details.
With today’s strong (and growing) job market and workers’ desires to fund fulfilling retirements, you may want to carefully consider offering employees this benefit sooner rather than later. Your financial advisor can help you evaluate your choices.
Changes in tax laws or regulations may occur at any time and could substantially impact your situation. You should discuss any tax or legal matters with the appropriate professional.