For ESOP companies, many believe that they cannot offer other retirement plans, however, that is not the case. You and other privately held companies have numerous options at your disposal, many of which can work in tandem with an ESOP.
401(k)s are employer-sponsored savings plans that allow employees to set aside a percentage of their paycheck to be invested into the plan. These contributions grow tax deferred, and employees do not pay taxes on the growth or on the contributions until they withdraw their funds at retirement.
Although 401(k) plans are sponsored by the company, employees can make the investment decisions rather than the company. Individuals have investment options to choose from and many times a company will provide for an employer match. Matches may be discretionary or based on a set formula. 401(k) plans are funded with pre-tax salary deferrals as well as a ROTH feature.
BENEFITS TO EMPLOYERS
• Company matches and plan overhead costs are tax deductible• Discretionary matching allows for more flexibility
• Improved employee retention and satisfaction
BENEFITS TO EMPLOYEES
• Tax-deferred contributions
• Tax-deferred growth
• Ease of contributions through payroll deductions
Safe Harbor 401(k) Plans
Safe Harbor 401(k)s are just like other 401(k) plans with one key difference: they can escape nondiscrimination testing in exchange for an employer match and certain vesting provisions. In conventional 401(k) plans, employers must pass a nondiscrimination test to ensure that all employees are utilizing the plan and that it wasn’t created simply to benefit the company’s highest earners. This test can be difficult for companies with low adoption rates to pass, so many will elect into the safe harbor option.
Employers will meet their plan’s safe harbor when they use one of the following three matching techniques:
1. Employer matches 100% of the first 3% of employee compensation, plus 50% of the next 2%.2. Enhanced matching where the employer matches 100% of the first 4% of compensation (not to exceed 6% of compensation).
3. Non elective contribution where the employer contributes 3% of compensation to all eligible employees.
Additionally, all contributions must immediately vest, and employees must receive certain information about the plan within 30-90 days of beginning employment.
BENEFITS TO EMPLOYERS
• All the same benefits as conventional 401(k) plans
• Can evade nondiscrimination testing
BENEFITS TO EMPLOYEES
• All the same benefits as conventional 401(k) plans
• Guaranteed employer match
Profit Sharing Plans
Profit sharing plans are – you guessed it – plans that share company profits with employees. Under these retirement plans, employees cannot contribute to their own plan; instead, the company contributes a discretionary amount. The contribution percentage is discretionary from year to year and can even be zero. When employers choose to contribute to the plan, they must do so using a predetermined allocation method (usually based on salary), and contributions must vest according to an IRS vesting schedule. These plans grow tax free. A profit-sharing plan can also be a component of a 401(k) plan.
BENEFITS TO EMPLOYERS
• Contributions and plan overhead costs are tax deductible
• Discretionary contributions allow for more flexibility
• Improved employee retention and satisfaction
BENEFITS TO EMPLOYEES
• Employees have additional funds allocated to them as part of their retirement.
Defined Benefit Plan
Defined benefit plans are retirement plans where employees are guaranteed an annual cash benefit for life beginning at retirement. The payout is based on a combination of their age, length of service, and salary. Pension actuaries calculate the projected cash needed to fund the promised benefits, and employers set aside cash to fund those payouts. Because these calculations are complex, the costs of administering these plans is high.
Defined benefit plans are different than defined contribution plans like 401(k)s because they pay a specified benefit at retirement. Defined contribution plans focus on the contributions themselves rather than the payout at retirement.
BENEFITS TO EMPLOYERS
• Contributions and plan overhead costs are tax deductible
• Benefits are insured through the Federal government
• Improved employee retention and satisfaction
BENEFITS TO EMPLOYEES
• Employees have additional funds allocated to them as part of their retirement.
• Benefits are guaranteed; the employer bears the investment risks.
Non-Qualified Plans
Each of the plans we’ve already discussed are qualified employer-sponsored retirement plans and are governed by the Employee Retirement Income Security Act (ERISA). Non-qualified plans fall outside of ERISA’s purview. Having a non-qualified plan gives employers the freedom to reward employees but disqualifies them from taking a tax deduction for the amounts they contribute to the plan.
Non-qualified plans are typically used to compensate executives; executive supplemental executive retirement plans and bonus plans are two examples of common non-qualified retirement plans.
BENEFITS TO EMPLOYERS
• The plan document can be as simple as needed
• No limit on contributions
• Contributions can favor certain employees
• Improved executive retention
BENEFITS TO EMPLOYEES
• Tax-deferred growth
Employees have additional funds allocated to them as part of their retirement.
If you would like to discuss any of these retirement plan options or would like to see if any can be employed alongside an ESOP, contact us today.
If you want to know how we can help you create a business ownership strategy that meets your specifications, contact us today.
