Tax Deferred Benefits Attract Great People

Author: Larry Chester, President

With the unemployment rate shrinking, it has become increasingly difficult for employers to find the right people for their companies and retain their most valuable employees. To stay competitive, companies need to offer great employee benefits that incorporate a retirement savings plan.

Many companies believe they can’t afford to have a retirement plan. The truth is that some plans cost very little to set up and maintain. The employer can further reduce their net costs because nearly all plans offer tax deductions for employer contributions. You can reduce your tax liability and attract and retain great employees all at the same time.

Let’s discuss some of the retirement plan options available.

SEP IRA
The SEP plan allows the owner to set up a plan for him/herself and each eligible employee (all employees over 21 years old who have worked for the business the last three of five years and is currently earning $600 or more).
Pros:
– Low start-up and operating costs
– Minimal paperwork and documentation
– Employer tax deduction for contributions
– The employer has the choice every year about how much they want to contribute
Cons:
– No employee contributions – all contributions come from the employer
– Each employee can choose his/her investments
– Contributions are vested 100% right away
– The same percentage amount must be contributed for all employees including the employer

The Right Fit:
This is a great plan for employers that don’t currently have a retirement plan and want to start a low-cost, low-maintenance plan.

SIMPLE IRA
The SIMPLE plan earns its title from how “simple” the plan can be to set up. This plan is available for businesses with fewer than 100 employees, and any employee that earned $5,000 or more in any two previous years and is expecting to earn $5,000 or more in the current year can participate.
Pros:
– Affordable
– Easy to set up
– Both employee and employer contributions are tax deductible
Cons:
– Distributions taken before reaching retirement age could be exposed to a 25% penalty (as compared
to the 10% penalty of other plans)
– Employee contributions are capped at $13,000 in 2019
– No Roth Option

The Right Fit:
This plan is great for employers that want to provide a retirement plan for their employees, while keeping costs low and set-up “simple.”

401(K) PROFIT-SHARING PLAN
The 401(K) Profit-Sharing Plan is one of the most popular retirement plans for small businesses. Employees can contribute up to $19,000 (in 2019), or up to $25,000 if age 50 or older, and can choose for these contributions to be either pre-tax or Roth. Employers can choose between discretionary contributions or matching.
Pros:
– Option of discretionary employer contributions
– Both Pre-tax and Roth options
– High contribution limits
– Flexibility in eligibility requirements and vesting schedules
– Both employee and employer contributions are tax deductible
– Within limits, contributions for owners and key employees can be optimized
Cons:
– May have higher costs
– Requires annual non-discrimination testing

The Right Fit:
A 401(k) Profit-Sharing Plan is a good fit for businesses that want to provide a retirement plan while also maintaining flexibility.

EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
The ESOP plan allows employees to have ownership in the company. Employees can receive annual contributions from the business to buy company stock, or the business can match employee contributions with company stock.
Pros:
– Contributions of stock are tax deductible for the business
– Allows for employee ownership, which can be an incentive to improve performance
– Can be viewed as a form of succession planning as it can help transition top management
– Stock contributions to the employee could be worth more than typical cash contributions
Cons:
– Can be costly to set up
– When new stock is issued, current owners’ shares can become diluted
– Limits the amount of diversification available
– Requires long-term planning to ensure funds are available to repurchase shares when applicable

The Right Fit:
An ESOP Plan is best for a business that strives to empower their employees with ownership in the business. While this plan can require some major planning, it can also be a great incentive for employees to elevate their performance.

CONCLUSION
With today’s strong (and growing) job market and workers’ desires to fund fulfilling a retirement, you may want to carefully consider offering employees this benefit sooner rather than later. These options provide a variety of approaches that will benefit your employees. For more detail on which plan is best one for your situation, be sure to consult with a qualified Financial Advisor.