Businesses looking to attract and retain loyal and valued employees often need to use more than salary alone. A qualified retirement plan can enhance an employee’s benefits package.
The self-made, vastly successful businessman Andrew Carnegie summed up how to run a successful business, “Take away my factories, my plants; take away my railroads, my ships, my transportation; take away my money; strip me of all of these, but leave me my men and in two or three years, I will have them all again.”
Carnegie knew that the key to any successful business was its employees. In order to attract and retain valued employees, salary alone is not enough. Using a qualified retirement plan to “sweeten the pot” of an employee benefits package can mean the difference between a business growing and thriving and one that slowly and painfully dies.
The Facts About a Successful Business
For many business owners, they have a qualified retirement plan in place. But the question they should be asking themselves is what kind of retirement plan is the best fit for their business.
- Employees are the glue that makes a business successful and profitable.
- To make it easier to recruit, hire, and retain the most productive employees, a good employee benefits package is needed and should include retirement benefits.
- A reduction in profits, increased competition, loss of confidence with customers and creditors, and replacing the employee are the results of losing a quality employee.
- Significant tax advantages are received from a qualified retirement plan for the business and its employees.
- For small business owners, relying on others to help achieve retirement income goals is not advised.
A Successful Qualified Retirement Plan
A qualified retirement plan is a program executed and maintained by a business owner or individual for the sole purpose of providing retirement benefits to employees. This program must meet specific rules dictated by the Internal Revenue Code.
If an employer wants to sponsor a qualified retirement plan for employees, the rules to follow include:
- The plan must be put in writing and communicated to all company employees.
- Established by the employer, the plan must exist for the exclusive benefits of the employees and their beneficiaries.
- Assets received from the plan may not be used for any other purpose than the exclusive benefit of all included employees or their beneficiaries.
- Only when the plan has been terminated and all obligations met, including the employee and their beneficiaries, does this rule end.
- No discrimination may occur in the plan benefits and/or contributions with regards to highly-compensated employees.
- Certain coverage, vesting, eligibility, and minimum funding standards must be met.
- Certain specified distribution requirements must be provided by the plan.
- Assignment or alienation of plan benefits for the plan are prohibited.
- Death benefits may be included in any retirement plan. However, these benefits are not to be the sole purpose of the plan and may be defined as “incidental” in the plan to be included.
So, why do employers jump to provide their employees with qualified retirement plans if there are so many rules? The answer is simple: tax advantages.
Tax Advantages of Qualified Retirement Plans
Saving is hard enough for the average American. Therefore, to encourage saving for retirement, a variety of tax advantages are offered by qualified retirement plans to businesses and employees. All qualified retirement plans offer significant tax breaks. They are:
- Business Expense Deductions: Any contribution made by an employer to a qualified retirement plan can be written off immediately as a business expense.
- Untaxed Employer Contributions: Contributions made by the employer to the employee are not taxed until the funds are actually distributed during the employee’s retirement.
- Tax-deferred Growth: Any investment contribution gains or earnings on a qualified retirement plan are not taxed until they are distributed from the plan.
Other incentives are also available depending on the type of qualified retirement plan. These include:
- Particular qualified retirement plans allow for employees to defer a portion of their salaries. The employer then contributes this amount to the qualified retirement plan. These salary deferrals which the employee elects to invest are not included in the employee’s taxable income. Therefore, any amount the employee puts into their qualified retirement plan is made with before-tax dollars.
- If the employee selects a Roth 401(k) plan option, then those same dollars are invested, but taxed at the time they are taken out. However, this option also means that when distributed during the employee’s retirement, no income tax will be paid on the amount contributed by the employee or the gains received while the investment grew.
- Distributions of a qualified retirement plan may qualify for special tax treatment.
- Employees who make contributions to certain qualified retirement plans and qualify with low- to moderate-income requirements, may be eligible for a tax credit.
- A tax credit may be claimed by small employers for part of the costs when establishing particular types of qualified retirement plans.
Establishing a Qualified Retirement Plan
For business owners, whether it is a sole proprietorship, a partnership, or corporation, who are interested in establishing a qualified retirement plan, can set up a qualified retirement plan for the benefit of the employees, even if the only employee is the owner or the owner and spouse.
As with any complicated investment strategy, consulting with a qualified financial advisor will ensure that all employees are presented with the best type of retirement plan and that employers are able to retain these employees once they are hired.