Updated: Sep 21, 2020
An employer-sponsored retirement plan is a cost-effective benefit strategy that is offered to employees at no or low cost. These benefit programs often include other services such as medical insurance for employees and tax breaks to the employer. Retirement plans fall into one of two general categories: defined benefit plans, in which the retiree is promised a defined monthly amount (also called pension plans), and defined contribution plans, where the employer, employee, or both contribute an amount of money into an individual account such as a 401(k) plan.
So now we know about two types of employer-sponsored retirement plans. You're probably wondering why, as an employer, you should sponsor a retirement program for your employees? We have answers that, by the end of this short read, will leave you wanting to set up your employer-sponsored retirement plan.
All Types of Tax Breaks
If you hate paying more taxes than you need to, an employer-sponsored retirement plan can be a great vehicle to help decrease your tax liability. As the employer, any contributions you make toward your employees' 401(k) plans, for example, are tax-deductible. It is important to note that contributions can many times be weighted so that the largest contribution is to the owner. In such cases, employers would then receive a tax break on the large contribution to their own plan. Meanwhile, the money sitting in the nest egg is invested for potential growth and any money it makes from investments is tax-deferred or in some instances tax-free. This makes it a great place to save money for your employees' futures.
Finally, employer-sponsored retirement plans can be great for your small business. The IRS says that if you have 100 or fewer employees and you meet other qualifications, you may claim a tax credit by filling out Form 8881 on the IRS website. The credit is for 50% of your eligible and necessary startup costs up to $5,000 per year. There is also an auto-enroll credit which brings the total credit to $6,500.
Attract and Retain Employees
If you are a good business owner--and we know you are because you're reading this--you know that your employees are your most precious asset. You also know that one of the keys to great leadership is doing right by your employees and looking out for their best interests. Just as you, the employer, benefit from sponsoring a retirement plan, so do your employees. Naturally, they are more likely to gravitate towards your company and stay with you for a long time, reducing turnover and the need to train new employees.
With an employer-sponsored plan, the employee enjoys tax breaks, as well as contributions and investments, are not taxed until distribution begins. Additionally, employee contributions are easy to make with payroll deductions, which reduce taxable income. For the employee, even small investments along with compounding interest add up over time, giving employees an opportunity to improve their financial security in retirement.
As mentioned, there are two general categories: defined pension plans and defined contribution plans, of which there are several types. These include but are not limited to 401(k) plans, Roth 401(k)s, 403(b)s--which are practically identical to 401(k)s except they are designed for nonprofit organizations--457 Plans, SIMPLE Plans, and SEP Plans. Each of these plans has their own rules and conditions, so if you need help deciding which plan is best for you, your company, and your employees, we are on your side: making sure your retirement plans are on the right track.