Retirement Insights

Catch and Keep Key Employees with an Ideal Retirement Plan

Catch and Keep Key Employees with an Ideal Retirement Plan

“Help Wanted” signs seem to be everywhere. Businesses are competing in a tight labor market for the best employee candidates. Finding and keeping key employees is, no doubt, becoming a critical business challenge for U.S. firms. Organizations need a way to stand out to employee prospects to overcome the real business risks associated with not being able to attract and keep key talent.
 

Today’s business owners have many plan design options available to help them and their employees achieve not only personal retirement savings goals, but also human infrastructure goals. And, as a result of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, businesses have more time to set up plans and more financial incentives to do so.

Extended Deadlines to Establish Qualified Retirement Plans

Prior to the SECURE Act, a business that wanted a qualified retirement plan (e.g., 401(k), profit sharing, money purchase pension, defined benefit pension plan, etc.) for a particular tax year had to establish it by the last day of the business’s tax year. For example, a calendar year business would have had to sign documents to set up the plan for 2021 by December 31, 2021, in order to be able to contribute to and take a deduction for contributions. (Special set-up rules apply for safe harbor 401(k) plans.)
 

Thanks to the SECURE ACT, for 2020 and later tax years, a business has more time—until its tax filing deadline, plus extensions for a particular tax year—to set up a plan. That means the plan establishment deadline is tied to the type of business entity as illustrated below. Note that simplified employee pension (SEP) plans have historically followed this schedule.

EXAMPLE:  The Limited is an LLC taxed as a partnership. Its standard tax filing deadline is March 15th of the year following the tax year in question. For the 2021 tax year, The Limited timely filed IRS Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns.  Consequently, it has an extended tax filing deadline of September 15, 2022, for its 2021 tax year. The owners of The Limited decide in August of 2022 they would like to set up a 401(k)/profit sharing plan for the business for 2021 and later years. The Limited has until September 15, 2022, to execute plan documents to set up the plan, effective for 2021. While The Limited would be able to make a profit sharing contribution on behalf of participants for 2021, participants can only make pre-tax employee salary deferrals and designated Roth contributions prospectively—meaning after they execute valid salary deferral elections for compensation yet to be received in 2022.

Extended Deadlines to Establish Qualified Retirement Plans

The SECURE Act also increased the potential credit amount for small employers to offset plan startup costs from $500 to $5,000 for the first three years; and created a new tax credit of up to $500 for automatic enrollment 401(k) plans and savings incentive match plans for employees (SIMPLE) IRA plans (see Retirement Plans Startup Costs Tax Credits for more details).

Plan Design Options

Plan designs range from straight-forward IRA-based arrangements like simplified employee pension (SEP) or savings incentive match plans for employees (SIMPLE) plans, all the way to ultra sophisticated 401(k), defined benefit and profit-sharing plans. The type of plan design a business owner chooses will be driven by the business’s cash flow, employee demographics and the owners overall objectives.  

With so many choices, some may not be sure where to start?  Use of a tool like the Retirement Learning Center’s (RLC’s) "Plan Suitability Survey" can facilitate this process. This survey will help you and your clients identify business and personal objectives and help determine the type of plan design best suited for each situation.  Designing the ideal plan for your business owner clients will help them maximize contributions and deductions for their businesses, while providing a valuable and thoughtful benefit to employees. 

When determining the ideal plan design one must first understand some of the basics regarding what types of plans are available, who can sponsor various types of plans and who will be allowed to contribute (i.e., the business owner, the employee or both).  The following comparison of the most common plans offered may be useful place to start.

The best way to begin a discussion about the ideal retirement plan is to pose this question to your business owner clients: How much can the business afford to contribute?  Other important questions include:

Do you want participants to make their own contributions (i.e., pre-tax salary deferrals, after-tax designated Roth contributions or standard employee after-tax contributions)?

Do you want employer contributions to be mandatory (fixed) or discretionary (flexible)?

How do you want to handle certain costs and fees (e.g., paid from plan assets or covered by the business)?

    With respect to cost, IRA-based plans tend to have lower administration costs because the underlying funding vehicle is an IRA.  Consequently, reporting is done by the administering financial organization holding the IR account or annuity for the employees.  Also, the IRS has free forms available for plan establishment.  Conversely, 401(k) plans, typically, require the use of a record keeper or third-party administrator (TPA) to handle the day-to-day administration of the plan in addition to costs associated with obtaining documents needed to establish a plan.

    The following table offers plan type and feature options based on how much a business owner can afford to contribute. (Threshold amounts are based on calculations that use the IRS contribution rules.)

     

    Some plan types can be combined for higher contribution limits.  For example, combining plan types such as a 401(k) with a cash balance plan is one way to maximize retirement plan contributions.  In addition, business owners have flexibility to use more complex allocation formulas and strategies that often allow the business owner and other select participants to receive a greater share of the overall contribution as compared with other participants.  As a result, business owners can often receive the maximum contribution amount allowed by law while rank and file employees receive lesser amounts.  The following chart illustrates the maximum contribution limits in a 401(k) plan alone, with a profit-sharing element, and when combined with a cash balance plan for 2021.

     

    As you can see, combining plan types may be ideal in helping a business owner achieve company and individual retirement savings goals.  It is worth noting that administration and plan document costs may be a bit higher in order to implement various contribution maximization strategies, so it’s important to evaluate the options to determine what makes the most sense for a particular business owner.

    Summary

    There is no “one-size-fits-all” solution when it comes to establishing a retirement plan.  It is critical that a business owner, with the help of his or her financial and tax advisors, first identify what are the business’s goals with respect to the plan, will employees be able to contribute to the plan from their own pay, will the company provide employer contributions and, if so, how much can it afford to contribute. Keep in mind that once established, a business may be able to change or enhance its plan down the road as circumstances change and the business grows.  A best practice is for business owners to leverage the expertise of tax and financial professionals to help them evaluate plan design options and arrive at the ideal plan design that will help them achieve human resource goals as well as retirement savings goals for the business owner and employees alike.

    1. For informational purposes only and is not to be construed as specific tax, legal, or investment advice. You are strongly encouraged to consult with your independent financial advisor, lawyer, accountant or other advisors as to investment, legal, tax and related matters.

      The opinions expressed are not necessarily those of the firm. These materials are provided for informational purpose only. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Any statistic contained herein have been obtained from sources believed to be reliable, but the accuracy of this information cannot be guaranteed. The views expressed herein may change at any time subsequent to the date of issue hereof. The information provided is not to be construed as a recommendation or an offer to buy or sell or the solicitation of an offer to buy or sell any fund or security.

      All investments involve the risk of loss of principal.

      FEF Distributors, LLC (“FEFD”) distributes First Eagle products; it does not provide services to investors. As such, when FEFD presents a strategy or product to an investor, FEFD and its representatives do not determine whether the investment is in the best interests of, or is suitable for, the investor. Investors should exercise their own judgment and/or consult with a financial professional prior to investing in any First Eagle strategy or product.

      First Eagle Investment Management is the brand name for First Eagle Investment Management, LLC and its subsidiary investment advisers.