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Retirement Savings Plans as a Benefit
Employees consider retirement savings an important benefit. A financial wellness survey conducted by PwC (PricewaterhouseCoopers) found that 62% of individuals seriously consider the availability of a retirement plan when deciding whether to accept or remain in a job and 76% of employees are likely to be attracted to another company that cares more about their financial well-being. Employers have a variety of options to provide retirement savings to employees and their self/spouse. The IRS has organized these options as the following:
● IRA - Based Plans – though most people think of an IRA as something that individuals establish on their own, an employer can help its employees set up and fund their IRAs. With an IRA, the amount that an individual receives at retirement depends on the funding of the IRA and the earnings (or losses) on those funds. Examples include Payroll Deduction IRA, Simplified Employee Pensions (SEP), or a SIMPLE IRA Plan.
● Defined Contribution Plans - Defined contribution plans are employer-established plans that do not promise a specific benefit at retirement. Instead, employees or their employer (or both) contribute to employees’ individual accounts under the plan, sometimes at a set rate (such as 5 percent of salary annually). At retirement, an employee receives the accumulated contributions plus earnings (or minus losses) on the invested contributions. Examples include: Profit Sharing, Safe Harbor 401 (k), Automatic Enrollment 401(k), and Traditional 401(k).
● Defined Benefit Plan - These plans promise a specified benefit at retirement, for example, $1,000 a month. The amount of the benefit is often based on a set percentage of pay multiplied by the number of years the employee worked for the employer offering the plan. Employer contributions must be sufficient to fund promised benefits.
The IRS publication Choosing a Retirement Solution for Your Small Business provides an excellent overview of these options and can be found here:
Considerations
✓ What type of plan will you consider?
o Your business structure will determine the retirement savings choices available to you.
o There are different contribution limits for each of the retirement savings options; think through how much you’d like to save for your own self/family and also which of these can you afford to offer to employees.
o Do you want to offer the same benefit to all employees?
o Some plans are easy to set up and administer while others take more time and require an administrator.
o Your contributions to an employee’s retirement savings will be a deductible expense for any plan you set up.
o A Roth program can be added to a 401(k) plan to allow participants to make after-tax contributions into separate accounts, providing an additional way to save for retirement. Distributions upon death or disability or after age 59 1/2 from Roth accounts held for 5 years, including earnings, are generally tax-free. ✓ Are you eligible for a tax credit for small employers?
o This enables you to claim a credit for part of the ordinary and necessary costs of starting a SEP, SIMPLE, or certain other types of retirement plans. The credit equals 50 percent of the cost to set up and administer the plan, up to a maximum of $500 per year for each of the first 3 years of the plan.
o Another tax credit for certain low- and moderate-income individuals (including self-employed) is available to those who make contributions to their plans (“Saver’s Credit”). The amount of the credit is based on the contributions participants make and their credit rate. The maximum contribution eligible for the credit is $2,000. The credit rate can be as low as 10 percent or as high as 50 percent, depending on the participant’s adjusted gross income.
✓ When identifying a provider for the retirement savings plans consider the following: o Type of Provider: Look for someone who is a fiduciary advisor. These are investment professionals who are legally obligated to put their clients’ best interests first.
o Costs: Understand how your plan provider is getting paid, who is getting paid and how much
o Investments: Know which investments are offered in your plan, the variety of investments available and the expenses associated with them.
o Plan design: Consider the distinctive needs based on your ownership structure, goals, and number and types of employees.
o Customer service: Evaluate how the plan provider will deliver customer service to you and your employees.
Action Steps/Questions to Consider
Who would I like to offer retirement savings benefits to?
What type of plan will allow me to maximize my retirement savings?
What type of retirement savings options would help attract and retain employees?
How much can I afford to contribute to employee retirement savings? Can I afford to make per pay contributions?
Who can I talk with to help sort out my options?
What are my next steps?
References
PwC. (2023). PwC's 2023 Employee Financial Wellness Survey- Guiding your employees through uncertain economic times. Found: https://www.pwc.com/us/en/services/consulting/business-transformation/library/employee financial-wellness-survey.html
Fontinelle, A. (2023). Retirement Strategies for Small Business Owners. Investopedia. November, 20, 2023. Found: https://www.investopedia.com/articles/personal finance/120314/top-retirement-strategies-small-business-owners.asp
Department of the Treasury, Internal Revenue Service. (2021). Publication 3998: Choosing a Retirement Solution for your Small Business. Found: https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource center/publications/choosing-a-retirement-solution-for-your-small-business.pdf
The Street. (9/14/2020), Four Things to Consider When Choosing a Retirement Plan for Your Small Business. Found: https://www.thestreet.com/retirement-daily/saving-investing-for retirement/4-key-considerations-when-selecting-a-retirement-plan-for-your-small-business
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This material is based upon work supported by USDA/NIFA under Award Number 2021‐70027‐34693, and is funded by the NE Risk Management Education Center.