Finding the Right Fit for Your Company’s Retirement Plan
By Joe DeSilva
Designing and managing a competitive retirement benefits package can be a daunting task – but a necessary one if your company wants to attract and retain talent who will help drive your company’s success. Today’s job-seekers expect more from their employers because they know that a good benefits package can amount to thousands of dollars in compensation each year. However, one of the key determinants for the type of retirement savings plan an employer can offer is the size of its workforce.
Not offering retirement benefits can put a company at risk of losing talented employees. But offering the wrong retirement benefits relative to the size of a company can lead to higher costs, compliance issues and challenges in acquiring and retaining the right talent. Here are some key considerations small, midsized and large companies should keep in mind as they develop and refine their employee retirement benefits.
Tailor a 401(k) Plan Based on the Size of Your Workforce
From sole proprietors to large corporations, most employers can offer their employees an opportunity to save for retirement through a 401(k) plan. These plans come in several different forms, some of which are more suitable for small businesses than others. One type of 401(k) plan that can be a good choice for smaller employers is the Safe Harbor 401(k) plan. While larger companies often have the resources to design and administer a 401(k) plan to meet the diverse needs of thousands of employees, a Safe Harbor plan offers smaller companies a less complicated plan design with certain compliance requirements that still provides a valued benefit to employees. This type of plan is easier for small businesses to maintain since it is not subject to the annual non-discrimination tests required under the Internal Revenue Code for 401(k) plans. However, because a Safe Harbor plan requires an employer contribution (either a matching contribution or a percentage of employees’ compensation) to be made for plan participants every year, the plan requirements do impact plan costs.
Small Businesses Have a SIMPLE Option
Businesses with 100 or fewer employees also have the option of choosing a Savings Incentive Match Plan for Employees (SIMPLE) IRA, which provides a low-cost and easy-to-administer retirement savings plan. SIMPLE IRAs are easy to administer because they are free from DOL non-discrimination testing requirements and are not required to file Form 5500. However, SIMPLE IRAs have a mandatory employer contribution. Employers have the option of making either a matching contribution, dollar for dollar, up to three percent of each employee’s compensation (can be reduced to as low as one percent in any two out of five years) or contributing two percent of each eligible employee’s compensation. Participants are immediately 100 percent vested in all plan contributions.
You’re a Very Small Organization? Check Out SEP Plans
A Simplified Employee Pension plan (SEP), may be a good fit for a small business – especially one whose business cycle is cyclical in nature – since the business is not required to contribute every year. This type of plan is also relatively easy to manage since the IRS nondiscrimination tests are not applicable and the plan does not need to file Form 5500. SEPs may be a smart choice for small businesses or self-employed individuals who want maximum contributions during profitable business cycles.
Because SEPs have more stringent eligibility requirements, they are not right for every employer. For example, employees who are at least 21 years old and have worked for the business for at least three of the last five years and earned at least $600 in the last year must participate in the plan. Plan participants are immediately 100 percent vested in all contributions.
Make an Informed Choice
Each company’s situation is different, so business leaders should consult with their tax and financial advisors for specific guidance on the right retirement plan for their organization. Larger companies often have the luxury of customizing their retirement plans to meet the evolving needs of their workforce. But while midsized and small businesses typically do not have the same resources as their larger peers, there are plenty of options that will enable them to offer employees valuable retirement benefits.
For small business owners that assume they can’t provide an employee retirement plan, they should reconsider if engaged employees are important to their companies’ success. A retirement plan allows both employees and small business owners to save for retirement – an important aspect of their overall financial wellness. In addition, providing a retirement plan for employees – regardless of company size – can mean significant income tax deductions. Most important, a retirement benefits package also helps companies attract and retain highly skilled workers that will help their business grow and thrive.
Joe DeSilva is the senior vice president and general manager of ADP Retirement Services.
The views expressed herein are those of the author, are intended for general information only and are not intended to provide investment, financial, tax or legal advice or a recommendation for any particular situation or plan. ADP, LLC and its affiliates (ADP) do not endorse or recommend specific investment companies or products, financial advisors or service providers; engage or compensate any financial advisors to provide advice to plans or participants; offer financial, investment, tax or legal advice or management services; or serve in a fiduciary capacity with respect to retirement plans. Nothing herein is intended to be, nor should be construed as, advice or a recommendation for a particular situation or plan. Please consult with your own advisors for such advice.