Providing Benefits that Benefit the Business and the Employee
Adding employee benefits to your business is a great way to support and retain employees. One of the most attractive benefits is a robust retirement plan. Not only will this likely help small and mid-size business owners retain more income, these owners will be able to solidify the organization’s unique value proposition when recruiting and retaining talent.
In 2019, Congress passed the SECURE Act, which in part allowed businesses to claim tax credits of up to $15,500 per year for the first three years if they implement a qualifying pension plan. Before the Act, initiating a new 401(k) plan saw businesses gain tax credits of only $500 to $5,000 per year. Additionally, owners who add an automatic enrollment amendment to an existing pension plan can receive a tax credit of $500 per year for the first three plan years after the amendment is implemented. Source: Congress.gov
With these updates in mind, let’s explore the options when it comes to adding retirement plans to your business benefits.
Qualified and Non-Qualified Retirement Plans
The two main types of retirement plans are qualified and non-qualified plans.
The common business term for a qualified plan is a 401(k). Although this term has become a blanket term for both types of plans, they are not the same. Qualified plans meet the requirements of 1974 Employee Retirement Income Security Act (ERISA). They follow the Internal Revenue Code as well. Employers can deduct the amounts they contribute to the plan, while employees’ contributions are generally tax-deferred.
Non-qualified plans are not subject to certain provisions of federal pension law. They do not follow much of the ERISA and the Internal Revenue Code. Non-qualified plans are free from restrictions related to non-discrimination, funding, and eligibility. The result is that fewer tax advantages are extended to the business and its employees. These plans are funded with after-tax dollars. Generally, employers cannot claim their contributions as a tax deduction.
While non-qualified plans are very different from qualified plans, owners can leverage them to form ideal employment packages and remain competitive in the market. Adding non-qualified retirement plans to the employment packages of key employees is one way to provide them with a sense of stability and a tangible reward when they choose to retire.
The Bottom Line
Generally, the employers do not need to match the contributions of the employee. Even so, it’s a very common practice to either match or partially match salary contributions. Doing so benefits both the employee and bottom line of the business and with the passing of the SECURE Act, there are more tax-friendly options to consider when implementing or updating a retirement plan for small- or medium-size businesses.
At Savant Retirement Plan Services, we work with business owners to help shape the ideal retirement plan for their businesses. Reach out to our retirement plan team here.
Patricia L. Hutchinson
Director of Retirement Plan Services
MBA