Pension plans are essential for recruiting and retaining employees and helping you stand out in the competitive job market, but there are plenty of choices. Some plans cost very little to set up and maintain, and almost all offer tax deductions for company contributions. The SECURE Act added some new monetary incentives for business owners to set up retirement plans – including a $ 500 tax credit when you set up auto enrollment and a potential credit of up to $ 5,000 for the implementation of a plan.
Who contributes, pay limits, tax benefits, fees, the size of your business, and payroll deductions are all important factors in evaluating the type of plan to design and deliver. Talk to your advisor about the possibility of improving not only your own retirement planning, but that of your employees as well.
DID YOU KNOW? A study by The Pew Charitable Trusts shows that once an employer offers a retirement plan, 52% of Millennials, 75% of Gen Xers and 80% of Baby Boomers sign up. In addition, employee participation – for workers of all ages – increases by almost 16% when an employer match is offered.
So what are the options? We will take a look.
First, some changes in the types of plans available have also been implemented with the SECURE Act, the most important of which are group employer plans (PEP). These plans are great for small businesses because they allow you to pool your plans with other businesses to reduce administrative burdens and costs, and give you access to plans you might not otherwise have. not be access otherwise.
Multi-Employer Plans (MEP) were available before the SECURE Act, but they have now relaxed the restrictions, making it easier for small businesses to band together to offer plans to their employees. In particular, the “bad apple rule”, which penalized an entire MEP if a company had a compliance or qualification problem, has now disappeared. Something else to keep in mind when designing your plan: The SECURE law now requires that in a defined contribution plan, companies must provide a lifetime income statement to members at least once every 12 months.
SIMPLIFIED EMPLOYEE RETIREMENT (SEP) IRA
The SEP plan is funded only by you, the employer, but each employee opens an IRA and chooses their own investments. Start-up and operating costs are minimal, and contributions vest 100% immediately. You retain discretionary control over the amount of annual contributions (up to 25% of an individual’s compensation), but you must make contributions for all employees over the age of 21 who have worked for the company and earned at least $ 650 in three of the previous five years.
Contributions are tax deductible for the business, and all profits increase tax-deferred until participants withdraw them. As a business owner, you cannot assign a higher percentage to yourself than to your employees.
The SIMPLE (Savings Incentive Match Plan for Employees) is affordable and easy to set up for businesses with less than 100 employees, with minimal ongoing maintenance expenses. Each employee can carry forward up to $ 13,500; $ 16,500 if 50 or over (2021). The company is required to make dollar-for-dollar matching contributions on the first 3% of employee voluntary deferrals, or a flat 2% contribution to all employees, whether or not they choose to contribute.
And like the SEP, all contributions are tax deductible. However, be aware that with the SIMPLE IRA, participants who make an early withdrawal within the first two years of account creation could be subject to a penalty of up to 25% of the withdrawal from the account.
401 (K) PROFIT SHARING PLAN
A 401 (k) profit sharing plan includes both employee salary deferrals and employer matching contributions. Typically, plan participants choose their own asset allocation from a variety of investments, including a Roth option, which allows for pre-tax or post-tax salary deferrals, respectively.
The company may also make profit sharing contributions among all eligible participants, but does not have to contribute in years with low profits – this is entirely at 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. A third-party administrator can help you design the plan.
EMPLOYEE SHAREHOLDING PLAN (ESOP)
An ESOP is set up through a trust fund through your company to make annual contributions to individual employee accounts, which are used to purchase company stock. Or your company can issue new shares to an ESOP, deducting their value (up to 25% of covered salary) from taxable income. Employers can match employee contributions to company stock, which can be worth more than a matching cash contribution. Shares are generally subject to a vesting schedule and employees pay no contribution tax until they receive the shares when they leave or retire.
With a post-COVID-19 job market and the desire of workers to fund fulfilling pensions, you may want to consider offering this benefit to employees as soon as possible. Your advisor can explain what is relevant to your business.
• Review the plans you currently have in place – is there an opportunity to change your plan?
• See if the SECURE law opens up plan options to boost your employees’ retirement
• Contact your advisor to learn more about the plans that make sense for your business.
Material created by Raymond James for the use of his advisers. The information in this document has been obtained from sources believed to be reliable, but we do not warrant that the above material is accurate or complete. Raymond James is not affiliated with any other entity listed here. © 2021 Raymond James Financial Services, Inc., FINRA / SIPC member. 21-BDMKT-5025 BS 7/21
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