by Zac Majors
Types of Retirement Plans – Which Type of Plan Suits Your Organization
We previously discussed how you can make sure your retirement plans are up to date and ERISA compliant, where we explained how you can maintain retirement plans for your employees. But how do you choose the best retirement plan for your employees? How do you make your organization more attractive?
Here, we will discuss the different types of retirement plans to choose from, so that you can better understand your employees’ needs and choose a retirement plan accordingly. The idea is to choose a plan that is not just favorable for your employees but also for you.
Types of Retirement Plans
There are profit-sharing plans where employers and employees contribute to a retirement account. Employees’ contribution is deducted from their taxable income while employers contribute (match your contribution by some formula) directly to the same account.
There are two main tax advantages of 401(k) plans for you as an employer:
Your contributions are tax deductible (to a limit as discussed in IRC section 404)
Deferrals and investment gains aren’t taxable
There are two types of 401(k) plans that you can opt for; the traditional 401(k) plans and the SIMPLE 401(k) plans. SIMPLE 401(k) plans are designed for small companies. Keep in mind, these are not the same as SIMPLE IRAs. SIMPLE 401(k) plans are a combination of SIMPLE IRA and traditional 401(k).
Also known as tax-sheltered annuities (TSA), 403(b) plans are offered mostly by tax-exempt organizations. The same principle as 401(k) plans is adopted where employees and employers both make contributions. The following can adopt a 403(b) plan:
Public schools, colleges and universities
Churches and chapels
Charitable organizations, which are tax-exempt
The 403(b) plan offers much more flexibility in contributions, and the option to invest is chosen by you; the employer. However, these plans are relatively harder to maintain, which may end up increasing administrative costs.
SEP (Simplified Employee Pension) plans are retirement plans that an employer sets up and makes tax deductible contributions on behalf of each eligible employee. SEP plans can be set up by businesses of any size and category. These plans don’t have as high start-up and maintenance costs as conventional retirement plans.
These plans are much easier to implement and operate and therefore aren’t as administratively “heavy” as the rest. However, employers must contribute equally for all eligible employees, which might end up being a slight inconvenience for you.
A Savings Incentive Match Plan for Employees, or also knowns as a SIMPLE IRA, is sort of a start-up retirement savings plan for organizations that don’t sponsor a retirement plan as of yet, but are looking to set up one.
In this plan, employees and employers, both make contributions. SIMPLE IRA plans typically have no start-up or operating costs, unlike conventional retirement plans, such as the 401(k).
However, if your organization has 101 or more employees, or you have any other retirement plan in place, you can’t set up a SIMPLE IRA.
These are plans where the employer’s contributions are completely discretionary. Employers can also choose not to make any contributions if they don’t want to. If contributions are made, you must set a formula for how the contributions are divided between employees. This may be based on seniority, performance or even age.
One of the most common formulas of calculating allocation percentages per employee here is the “comp-to-comp” model. This model suggests that employers contribute a certain percent of the employee’s compensation and multiply that percentage by the total profit.
This model has been proven to be extremely helpful for organizations with cashflow issues. However, the flexibility means high administrative costs. Furthermore, different formulas need to be tested in order to ensure that there is no discrimination.
Defined Benefit Plans
These are plans where a benefit is agreed upon between employees and employers at retirement. There is a fixed benefit for this plan which is usually more attractive for employees. Employers can contribute and deduct more each year as agreed in the initial plan.
This is a rather complex and costlier type of retirement plan for employers (not just from an administrative point of view). However, the plan remains a rather attractive one, especially for senior employees. This is because you can offer substantial benefits in a short period of time, helping employees save more in less time.
This plan has been proven to be extremely effective for organizations who wish to promote early retirements.
These are just some of the retirement plans that you can adopt in your organization to make yourself more attractive for employees, all while maintaining cost-effectiveness. There are more plans out there, but they can get slightly more costly and complicated.
If you’re looking for a plan to implement in your organization or simply want to learn more about a new type of retirement plan, you can find experts at Centric always ready to help you out! We’re just a call away – so what are you waiting for!