A winning benefits package can set your business apart
Offering prospective employees the right benefits can help boost your firm’s appeal.
To stay competitive, your business needs to maintain a vibrant culture and impressive benefits – and that includes offering a retirement savings plan. According to survey data, 85% of workers see retirement benefits as important, and 80% consider retirement benefits a major factor in their final decision-making among prospective employers.1
It may surprise you to learn that some plans cost very little to set up and maintain, and nearly all plans offer tax deductions for contributions made by the business. Recently, the SECURE Act added even more incentives for small businesses to get their retirement plans up and running. 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, as well.
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. The contribution limit is 25% of an employee’s compensation, or $69,000 for 2024, whichever is less. You must make contributions for all employees who are over 21 years old and have worked for the business in at least three of the last five years, provided that in the year the employee becomes eligible, they earn more than the minimum indexed compensation amount.
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.
SIMPLE IRA
A savings incentive match plan for employees (SIMPLE) IRA gives small employers (up to 100 employees) an easy way to contribute toward their employees’ retirement. The startup and maintenance costs are very low compared to qualified plans.
A SIMPLE IRA is funded jointly by employees’ elective salary deferral contributions and employer contributions. Like the SEP, all contributions are tax deductible. In 2021, each employee may defer up to $16,000, or $19,500 for those 50 and older. The employer is required to make a fully vested contribution using one of the following formulas:
- Match elective deferrals dollar for dollar up to 3% of a participant’s compensation (compensation includes employee deferrals)
- Make a 2% contribution to all eligible employees, regardless of elective salary deferral, who received $5,000 in compensation from the employer in that year.
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. 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.
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 employees to lose significant dollars if they leave an employer before becoming 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.
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.
As you consider these different options, know that your employees will likely take advantage of what you offer – the same 2020 survey indicated that when employers offered a retirement plan, 73% of millennials, 79% of Gen Xers and 80% of baby boomers participated. Your financial advisor can help you evaluate your choices.
1 Transamerica Center’s 20th annual retirement survey
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. These plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.
