Employee Benefit and Retirement Plans: Everything You Need to Know
By Scott Kogler, CPA/PFS and Nicholas Piehler, CPA
In today’s competitive market for talent, your employee benefits plan can play a significant role in attracting and retaining employees. It’s important to understand the options available to your business – and how each one affects your financials – in order to make a sound choice.
One critical benefit is an employee retirement plan. Here’s a rundown of retirement plan options, and a few pros and cons for each.
SIMPLE 401(k) and SIMPLE IRA Plans
For a small business, these types of plans are a good first step to offering employee retirement plan benefits. These plans involve contributions by both the employer and the employee; the employee’s contributions are made pre-tax, deducted from each paycheck. Funds are invested, and the employee pays no tax until they withdraw money at retirement.
Pros: A SIMPLE 401(k) or SIMPLE IRA is the least expensive employee retirement plan type to administer, and the requirements for testing and reporting are minimal. They are a popular choice among businesses with fewer than 25 employees.
Cons: These plans require a minimum level of employer contribution and set lower limits for employee contributions than a traditional 401(k). If your business employs more than 100 people, these plans are not an option.
Traditional 401(k) or 403(b) Plans
While similar to SIMPLE 401(k) or SIMPLE IRA plans, these plans offer much greater flexibility to both the employer and employee. Funded by contributions from both the employer and employee, they are often the retirement plan of choice for businesses with 50 or more employees.
403(b) plans are an option only for tax-exempt organizations such as public schools, churches or other nonprofits.
Pros: Employees can contribute at a higher level, and the employer has many options in contribution types, including profit-sharing. Distribution and vesting requirements are flexible.
Cons: These plans are subject to annual discrimination testing, and costs for both setup and administration are higher than they would be for the SIMPLE plans.
Employee Stock Ownership Plans (ESOPs)
An ESOP is an employee retirement plan that offers employees an opportunity to benefit directly from increases in the value of the company’s stock. As plan participants, employees share ownership in the company and receive certain tax benefits accordingly. Companies offer ESOPs as one way to more strongly align the interests of their employees with those of other shareholders.
Pros: An ESOP can create a meaningful and direct incentive for employees to work toward the long-term success of the company, with rules designed to ensure such a plan benefits the employee fairly and broadly. ESOPs are often set up to provide a market for the shares of departing owners of successful, closely held companies. A company with an ESOP may also choose to take advantage of incentives to borrow money to acquire new assets using pre-tax dollars.
Cons: Setup costs can be substantial, and private companies must repurchase shares of departing employees, which can become a major expense. If your business is a partnership or professional corporation, the law does not allow you to offer an ESOP.
Defined Benefit Pension Plans
Unlike a 401(k) plan, a defined benefit pension plan is funded completely by the employer, with no employee deferrals allowed. A company with this type of employee retirement plan often also offers a 401(k) plan. While large businesses historically provided employee benefit plans that included a defined benefit pension, these plans have fallen out of favor due to their high cost.
Pros: Employees appreciate the retirement income security provided by a defined benefit pension plan. As an employer, you can defer income well in excess of 401(k) plan limits, which can be advantageous for certain businesses.
Cons: Such plans require significantly higher levels of funding, and they are more costly and complex to administer.
Choose Your Employee Benefits Plan Strategically
In addition to selecting an employee retirement plan, you will also need to consider additional benefits that could include health insurance, dental and vision coverage, fringe benefits, relocation assistance and tuition assistance. Although all are optional for small business owners, your company’s commitment to offer a strong benefit package can help attract and retain the right employees.
Davie Kaplan can help – whether it’s weighing your options for employee benefit and retirement plans or selecting the right mix for your overall business. Our expert team of CPAs and financial advisors has been serving businesses in the Rochester, NY area since 1934. We offer deep, industry-specific experience and a local touch, and we’re equipped to help clients of all sizes.