Employee Benefits: Retirement Plans
As an employer, you may want to establish one or more retirement plans for yourself and/or your employees. Having a plan can provide significant benefits for both you and your employees. There are many different types of retirement plans and choosing the right one for your situation is a critical decision. You want a plan that will meet both your goals as the employer and the needs of your employees. In addition, it is important to balance the cost of maintaining a plan against the potential benefits.
General benefits of retirement plans
By establishing and maintaining a retirement plan, you can benefit both your employees and yourself as employer. From your perspective as an employer, one of the main advantages of having and funding a retirement plan is that your employer contributions to the plan are generally tax deductible for federal income tax purposes. Contributing to the plan will therefore reduce your organization's taxable income, saving money in taxes. The specific rules regarding deducting employer contributions can be complex and vary by type of plan, so you should always consult a tax professional for guidance.
Questions to consider when choosing a retirement plan
There are many different factors to consider when choosing a retirement plan for your company. In some cases, more than one type of plan will meet your needs. If this is the case, you will need to further refine your choices by looking at how each type of plan meets your needs as well as the limitations.
You can zero in on the key areas of importance and take the first step to finding the right plan by answering the following questions:
What kind of a business entity do you have? Do you have a sole proprietorship, a partnership, a corporation, a limited liability company filing a corporate return, or a limited liability company filing a partnership return? Some plans are more appropriate for certain types of business entities than for others.
How many employees do you have right now? How many do you expect to have in one year, three years, and five years from now? Some plans impose limits on the number of employees you can have.
What is your current compensation and the current compensation range for your employees? What do you expect your compensation and the compensation range for your employees to be over the next year, three years, and five years?
How old are you, and what is the age range for your employees? Some plans allow contributions to be allocated based on age.
How much do you want to put away in the retirement plan each year for yourself and/or your employees?
Who do you want to fund the retirement plan contributions? Just you as the employer? Just the employees? Both the employees and you as the employer?
If you as the employer are funding at least some of the contributions, what percentage of employee compensation do you want to contribute each year?
How important is it for you to minimize the amount of contributions to rank-and-file employees, as compared to those for you and other executives?
How stable or unstable have your company's profits been in the last few years?
What are the company's expected profits in the next year? Three years? Five years?
How important is it for you to have flexibility in the amount of retirement plan contributions you make each year, as opposed to contributing a fixed amount or fixed percentage of employee compensation regardless of the company's bottom line?
How important is it to you to delay vesting and employee control of contributions made by you as the employer?
How important is it that the retirement plan be simple to understand?
How important is it that the retirement plan be relatively inexpensive to set up and administer?
How important is it for the plan to be competitive to attract and/or retain employees?
How important is it to reduce the current taxable income of you and your employees through employer and employee contributions?
Do you have a stable workforce, or a high turnover rate among your employees?
For more employee benefits and business planning tips, visit MNM Vested, LLC.
IMPORTANT DISCLOSURE The information presented here is not specific to any individual's personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.