Tag Archives: retirement plan

What Type of Retirement Plan Should You Offer Employees?

Offering a retirement plan to your employees can be mutually beneficial in several ways. Besides improving the well-being of your workers and positively impacting their future, it can be used as a recruiting tool, serve as a motivator for increased productivity and decrease turnover. Additionally, it can often give your business some considerable tax advantages. Which type of retirement plan should you offer?

 

Defined Contribution Plan

A defined contribution plan is on the Investopedia website as “a retirement plan in which a certain amount or percentage of money is set aside each year by a company for the benefit of the employee.” There are several types of plans that fit under this umbrella including 401(k), 403(b), SIMPLE, etc. When it comes to how much money an employee can pull out of a defined contribution plan, it’s contingent upon how much you and your employee put in and the interest rate.

Pros

  • You and your employees have more control over what you contribute
  • You can easily calculate your obligations each year

Cons

  • You could potentially incur fines if you’re not compliant with the IRS, HIPAA, ERISA, etc.

 

Defined Benefit Plan

A defined benefit plan is defined on the Investopedia website as “an employer-sponsored retirement plan where employee benefits are sorted out based on a formula using factors such as salary history and duration of employment.” As an employer, you’ll usually make most of the contributions — and unlike a defined contribution plan, employees receive a fixed amount of money once they retire. Choosing this plan tends to work well for many smaller businesses because there are no employee number requirements.

Pros

  • You can often get bigger tax deductions with a defined benefit plan than you could with a defined contribution plan
  • Significant benefits can accumulate within a relatively short period of time
  • Employees can better predict the benefits they’ll receive

Cons

  • This tends to be a costly plan to establish
  • It’s complicated from an administrative standpoint
  • You will have to pay an excise tax if either minimum contributions are not made or excess contributions are made

 

Qualified Retirement Plan

Unlike the previous two types of plans, a Qualified Retirement Plan is also defined on the Investopedia website as “falling outside of ERISA guidelines” and is not eligible for tax-deferral benefits. In turn, they tend to be very flexible and can be customized to the specific needs of individual employees. These aren’t usually used for lower-ranking employees, but instead are designed for those in executive positions. As a result, a qualified retirement plan isn’t geared toward the masses, but can be ideal in certain cases.

Pros

  • There is a lot of leeway, and it can be tailored to reach an employee’s exact objectives
  • You can minimize your administrative and funding costs
  • There can be major long-term tax advantages

Cons

  • It isn’t practical unless you have high-ranking executive employees
  • You can’t capitalize on deductions until an employee actually retires
  • It comes with greater liability than other plans

 

There’s no doubt that offering a retirement plan is a great choice for many employers and can be a contributing factor to the long-term success of your business. Understanding the key differences between these common plans allows you to choose the best one that meets the needs of both your company and employees.

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What to Expect From Your 401k Administration

A 401k plan is a popular option that allows employees to contribute to their retirement funds and offers a reasonable level of customization. The formal definition by Investopedia is “a qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on a post-tax and/or pretax basis.”

There is also the option for employers to contribute to their employees’ 401ks, which can benefit both parties. If you’re new to this process, it can seem a bit confusing during the initial stages. Let’s now discuss the basics and what you can expect from 401k administration.

 

Getting a 401k Administration: Solutions for Employers and Employees

Having an administrator is necessary for three main reasons. First, they help employers come up with workable plans and prepare the legal documents. Second, they understand the laws and stay updated on changes to ensure that everything remains compliant. Third, an administrator will monitor a 401k on an ongoing basis to ensure that everything is in the best interest of both the employer and employees.

In some cases, the employee will pay for the administration fees, and other times it will be covered by the employer. The primary reason that an employer chooses to pay an administrator is because of the tax benefits it can provide. Most of the time, an employer will have some degree of contact with an administrator, but employees do not. While 401k administration involves several steps, here is the general breakdown of the services offered.

 

Consulting and Creating a 401k Plan

Because of the flexibility of a 401k plan, it’s necessary for an administrator to consult an employer to identify their specific needs. Some things that might be discussed include:

  • Who will be allowed to participate (e.g. individuals 21 years of age or older, full-time employees, etc.)
  • Whether the employer will contribute, and if so how much
  • Contribution limits
  • Arranging a trust for holding contributions

An administrator will then establish an appropriate plan while keeping in mind regulations. They will also need to develop a plan of action in case things don’t go as anticipated and problems arise.

 

Compliance Monitoring

Once a 401k plan has been set in place, it’s mandatory that the rules be followed. Otherwise, it could result in legal problems and tax issues, which isn’t good for anyone. Because of the ever-changing laws, it’s not all that hard for mistakes to be made, so an administrator will keep tabs on plan development on an ongoing basis. They will ensure that both the employer and employees are adhering to the guidelines and take into account any changes to laws. In some cases, they will make updates to a plan to ensure compliance.

 

Transaction Monitoring

An additional element of administration is consistently checking that contributions, loans and any other transactions are compliant with a 401k plan. The administer will be responsible for authorizing these transactions and making sure that there is no questionable behavior.

In many cases, it’s a good idea to offer this type of retirement plan because it’s an effective recruiting tool and can make employees more loyal. Although 401k administration can seem somewhat overwhelming, it should become easier to understand once you get a grasp of the basic concept.

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