Why a Qualified Plan?
In today's competitive labor market, few employers can successfully attract quality people without offering a comprehensive employee benefit program. And one concern of today's labor force is retirement security. A major component of a competitive employee benefit program must be one or more qualified profit sharing or pension plans.
What Are My Options?
There are several options available, you can choose to offer one or a combination of the following plans.
• Profit Sharing Plans
This option offers deferred sharing of employer profits with employees. Contributions to the plan are usually discretionary, a feature many employers find desirable if they're not certain how much they can contribute to a plan from year to year.
• 401(k) Savings Plans
This is a type of profit sharing plan that allows pre-tax employee contributions, with or without matching employer contributions. The annual individual savings deferral is limited. This amount is increased by the government annually for cost of living adjustments.
• Money Purchase Pension Plans
In these plans, the annual employer contributions are defined. The annual contribution limit for any participant is the lesser of $30,000 or 25% of total compensation. However, the actual amount required to be contributed each year is defined by the plan itself, and does not depend on profitability or cash flow.
• Defined Benefit Plans
This plan type pre-defines the dollar amount of employees' retirement benefits. The employer has minimum funding requirements, regardless of profitability. Benefits received at retirement are limited each year. This maximum amount increases each year for cost of living adjustments.
• 403(b) Annuity Plans
403(b) plans are also known as tax sheltered annuities or TSAs. This type of plan is only available to the employees of tax-exempt charitable organizations or public schools. Like 401(k) plans, TSAs can accept pre-tax contributions from employees as well as employer matching and discretionary contributions.
• Employee Stock Ownership Plans
ESOPs allow employees to become stockholders in the company through employer contributions of the company's stock.
How Do I Choose?
Any of these plans can be very successful with sound design, promotion, implementation, and administration. Choosing the plan that's best for your organization depends on a thorough analysis of the following factors:
• Workforce Demographics
Who comprises your workforce? Are they predominantly young or old? Are they mostly primary or secondary wage earners? Is your workforce primarily married or single? How high is your employee turnover? Is it easy for you to replace good workers? Are your employees highly motivated and productive?
• Cost Considerations
How much money can you afford (or do you desire) to spend on deferred compensation and retirement benefits? Consider both the funding and administration of the plans.
• Do you expect your budget for these programs to rise, stay the same, or decrease in the future?
• How much do you feel employees should contribute toward their own retirement?
• Administrative Requirements
Do you have staff capable of administering the plans efficiently? Are there reliable resources available outside your company to provide this service efficiently, accurately, and economically?
• Legislative/Tax Regulations
How does current and pending legislation affect your current plans? Which plans make the most sense for your organization based on legislative requirements and tax guidelines?
• Employee Expectations
What do your employees expect in the way of retirement plan benefits? Have they indicated the plan features they prefer through surveys, exit interviews, or the "grapevine"?
• Other Considerations
Do you currently have qualified plans that need revision due to tax law changes or other circumstances? Are you actively seeking ways to attract additional capital funding for your company? Are your owners or other key executives involved in estate planning decisions?
• The answers to these questions will dictate which type or types of qualified plans are best for you.
What Are the Advantages of a Qualified Plan?
Whichever qualified plan you choose, they all have important advantages for you the employer:
• They enhance your competitive position in the labor marketplace.
• They provide your employees, including management, with logical, effective ways to accumulate capital and/or retirement income.
• They provide you with tax deductions for your plan contributions and administrative expenses.
• Profit sharing plans and 401(k) plans motivate employees to take a more personal interest in the company's success.
• Employee stock ownership plans can increase cash flow and working capital, can create a market for closely held stock, and can provide cash for current stockholders. How much capital could you accumulate over a 30 year period with qualified plans? Here's an example:
o If you start a money purchase pension plan and a 401(k) plan now...with combined annual funding to your accounts in those plans of $30,000 and an annual investment return of 8%, your account balance after 30 years would be over $3,000,000. All from a tax-deductible employer contribution of only $900,000.
In short, qualified plans offer you the opportunity to tailor an employee retirement program to your needs as well as your employees'.
