Business owners don’t only have to think about their retirement, but they should also consider the retirements of their employees. Choosing the right benefits depends on many factors, so it’s very important to work with a retirement planning group that offers specialized services for employers. PAX Financial Group does.
For example, how can you offer good benefits to your employees without blowing your budget?
Good benefits are crucial in attracting and retaining great employees. Why? First, prospective employees will compare your benefits with those of other companies. Forty-two percent of all companies, for instance, offer matching 401(k) retirement plans. If you don’t offer a retirement plan, you may lose potential employees to a competitor that does, especially those that offer attractive matches.
Second, existing employees care about their benefits and are more likely to stay on the job if they are happy with the benefits they are offered. Benefits constitute a good portion of an employee’s total compensation. Employees who are satisfied with their benefits are generally loyal to their companies. Loyalty equals good retention rates, so benefits can help keep top performers. Employees who are not loyal can be lured away by competitors.
Third, if you have poor retention rates, it can cost you. Businesses can spend the equivalent of an employee’s salary replacing them – and that’s not even factoring in the lost productivity of a departing employee.
In other words, offering good benefits can ultimately strengthen your business. Employers often worry that benefits will blow their budget, but in fact offering benefits often provides advantages for the business.
This is especially important now as many people who became unemployed, were furloughed or are looking to change jobs due to the Coronavirus pandemic re-enter the work world and look for positions. Employers have the opportunity to find some impressive talent. As families do a retirement checkup, it can be just as beneficial for employers to have a retirement checkup too!
Benefits and Payroll Deduction Plans
As soon as you classify someone as an employee (rather than as a contractor), you are required to offer certain benefits by law. These include the withholding required by the Social Security, Medicare and Federal Insurance Contributions Act (FICA), unemployment insurance and workers’ compensation (depending on your state). If you have 50 employees or more, you are also required to offer 12 weeks of family and medical leave and health insurance.
These benefits require a payroll system of deductions, as some contributions are made by both the employee and the business. Once you have a payroll system, you can set up additional benefits through employee payroll deduction.
Some of the most common (and popular) benefits offered by payroll deduction are:
- Health insurance
- Dental and vision insurance
- Life insurance
- Disability insurance
- Retirement plans
If you offer employees the ability to contribute to these plans pre-tax, it can reduce your own payroll taxes.
It’s important to discuss your situation and your options with a retirement planning group that specializes in employer issues.
Bonuses are a one-time payment, often linked to good individual or company performance. Bonus payments can be tax-deductible for the company.
In addition, bonuses allow you to manage compensation effectively. Because they are one-time payments, they can be used to incentivize and reward employees, but they are more flexible than a salary structure and raises. They do not lock you in to a certain compensation level, because they don’t have to be given, or given at the same rate, every year.
Retirement plans are some of the most popular benefits an employer can offer. Social Security doesn’t always pay much to retirees – and perhaps more importantly, many young workers fear it won’t be around when they retire.
Your choice of retirement plan can matter to the business, though, as each plan offers different advantages for you. Here’s a brief run-down.
Defined Benefit Plans Versus Defined Contribution Plans
Company-sponsored retirement plans come in two basic flavors: Defined benefit plans and defined contribution plans.
Defined Benefit Plans: Pension Plans and Profit-Sharing
Pension plans are an example of defined benefit plans. As the term implies, employees will receive a specific, defined amount at retirement. Pension plans have somewhat fallen out of favor in the United States in recent decades, partly because they are less cost-effective administratively than defined contribution plans like 401(k)s.
But the advantages of a pension plan to your business shouldn’t be overlooked. You can contribute a much higher amount to a self-funded pension plan that you can with any other retirement vehicle.
For 2020, the contribution limit is $230,000 – exponentially higher than the $6,000 limit of an Individual Retirement Account (IRA), the $19,500 limit for a 401(k) and the $57,000 limit of a Simplified Employee Pension (SEP) IRA. The high amount allows business owners to catch up on their retirement contributions.
The pension contributions are also tax-deferred; you don’t have to pay taxes until you retire, at which point, your tax bracket could be lower.
Profit-sharing plans are also a type of defined benefit retirement plan, in which you contribute a share of company profits to employee retirement accounts.
These have several advantages for business owners.
- In some plans, the contribution is tax-deferred.
- You are not required to contribute to the profit-sharing in years in which your company isn’t profitable. In fact, the amount you contribute is discretionary every year. Profit-sharing plans, then, are more flexible than other types of plans.
- These plans also have high contribution limits – $57,000 or 25 percent of compensation, whichever is less.
Defined Contribution Plans: 401(k)s and SEP IRAs
Defined contribution plans received their name because the final retirement benefit isn’t defined or fixed, but the contribution is. When employees withdraw funds at retirement, the amount will depend upon the amount the employee or employer contributed, any company match, what the investment choices were and how those investments performed.
In a 401(k), one of the most widespread defined contribution plans, employees must choose a percentage of their salary to contribute. Their contributions are made pre-tax. Any company match links to the percentage amount chosen by the employee.
Defined contribution plans are advantageous for businesses for several reasons. First, the administrative costs are much less than those of defined benefit plans, so these plans can be much more cost-effective.
Second, any 401(k) match you choose to give is tax-deductible on your federal tax return. They may also be deductible on your state taxes and your payroll taxes.
Third, under the Setting Every Community Up for Retirement Enhancement (SECURE) legislation, which went into effect in late December, small businesses will receive a tax credit to offset new 401(k) plan costs with automatic enrollment.
A SEP IRA plan is slightly different than a 401(k) but offers the same cost-effective advantage. Unlike 401(k)s, however, contributions to SEP IRAs are made only by the employer; employees don’t contribute. Contributions are tax-deductible. In addition, contributions don’t have to be made every year, which provides flexibility.
Choosing which benefits to offer and the advantages for your business can be complex. Taxation and other regulations are subject to change. Be sure to discuss your options with a retirement planning group that understands the unique issues employers have.
This material is provided by PAX Financial Group, LLC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information herein has been derived from sources believed to be accurate. Please note: Investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results.