Retirement plan options

March 13, 2017 -  By

iS498304794golden-eggStarting an employee retirement plan is a great way to help employees plan for their futures while rewarding them in the process. It also may incentivize them to help grow the company while reducing taxes.

Retirement plans present significant tax advantages for both employers and employees. Contributions from the employer are deductible and contributions from the employee are deductible and grow tax deferred until distributed at retirement. The three most popular plan types are 401(k) plans, SEP IRAs and Simple IRAs. First, you’ll need to answer some simple questions:

  • Do I want to or can I afford to do a match for my employees?
  • Do I want to allow employees to contribute to the plan?
  • Do I need flexibility to access the funds prior to retirement for emergencies?
  • Do I want a profit-sharing option?
  • Do I have a high employee turnover rate? If so, consider a vesting schedule for employer contributions.

401(k) alternatives

Traditional 401(k)s may not be effective because the IRS’s “top heavy testing” rules may disqualify management’s and ownership’s contributions.

There are, however, alternatives to traditional 401(k)s that will allow all employees and owners to contribute, giving the participants tax-deferred compensation, as well as allowing the company a tax deduction without the burdensome income testing that usually hijacks the good intentions of owners and management.

I can’t make you an expert on these plans in this space, but I aim to arm you with enough information to discuss them with a financial professional to determine if one is right for you.

A Safe Harbor 401(k) may be a good fit for landscape companies. Here are a few attributes of this plan:

  • There is no annual discrimination testing (highly vs. non-highly compensated employees);
  • They are available to firms with one or more employees;
  • There is a minimum amount of employer contribution required;
  • The maximum employee contribution is $18,000 with an additional $6,000 for those 50 or over;
  • The employer must make a specified matching contribution or a 3 percent contribution to all employees;
  • Employees can decide how much to contribute;
  • Employee salary reduction contributions and all safe harbor employer contributions must vest immediately. Profit-sharing contributions may vest over time; and
  • Employers must file annual tax form 5500.

Simplified Employee Pensions (SEPs) are another option. They are most popular among self-employed individuals with few employees since they are 100 percent funded by the employer—no employee contributions are permitted. Here are a few details:

  • They permit contributions up to 25 percent of compensation to a maximum of $54,000;
  • There is no requirement to make a contribution in any one year; and
  • Contributions are immediately vested.

Another possibility is the Savings Incentive Match Plan for Employees (SIMPLE) IRA. Compared to a 401(k) or more sophisticated alternatives, the SIMPLE IRA is a good way to capture most of the benefits of a retirement plan without the added cost and administrative hassle. Items you should know about SIMPLE IRAs:

  • They are available to companies with 100 or fewer employees who do not maintain any other retirement plans;
  • The maximum employee contribution is $12,500 with an additional $3,000 for those 50 or over;
  • The employer must match employee contributions (100 percent of the first 3 percent of compensation), but employees can decide how much to contribute;
  • They must be offered to all employees who have $5,000 of annual compensation in any two prior years; and
  • Contributions are 100 percent vested.

Retirement plans can be a great way to save taxes at the company level, motivate employees and defer employee taxes. In most cases traditional 401(k) plans in service firms result in significant restrictions on owners and managers, SIMPLE IRAs and SEPs bypass these restrictions and are relatively easy to administer. Safe Harbor 401(k) plans require more administration than a SIMPLE IRA or SEP but also bypass the restriction of the traditional 401(k).

Photo: ©istock.com/Cogent-Marketing

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Daniel S. Gordon

About the Author:

Gordon is a New Jersey-based CPA and owner of Turfbooks, an accounting firm that caters to land care professionals throughout the U.S. Reach him at dan@turfbooks.com.

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