Offering strong benefits—such as solid retirement options—is one step you can take to remain the best employer option for potential candidates. However, you need to understand the differences between the available plans. Most employer-sponsored plans are qualified retirement plans, and these include 401(k) plans, 403(b) plans, SARSEP plans, SEP-IRA plans, and SIMPLE IRA plans. Qualified plans provide a tax incentive for businesses that contribute to their employees' retirement savings.
Below we'll dig deeper into the factors behind qualified retirement plans and help you understand what you need to consider when selecting a plan.
Related Blog: Retirement Plan Options for Your Business: The Difference Between Cash Balance and 401(k) Plans
The central divergence between a qualified and non-qualified retirement plan is whether the plan fits under the guidelines of the Employee Retirement Income Security Act (ERISA) plan. This act was passed in 1974 with the intention of protecting income by enforcing some structure and transparency in how retirement investments are made. At its core, ERISA seeks to reward businesses for offering the same retirement contribution percentage to employees—regardless of how high or low their salaries are—by making these contributions tax-deductible.
Of course, there are a few other stipulations. While certain eligibility requirements for retirement plan contributions may be set, after a certain period of employment, these become the non-forfeitable right of participating employees. These eligibility requirements must be communicated clearly to all employees. Documentation about this plan's details and schedule of investments must be made available to participants, at the very least if they ask for them (businesses can also be proactive in reporting, to avoid any potential controversy).
There are some key things employers need to keep in mind as they consider qualified retirement plans for their employees.
Qualified retirement plans are eligible for added tax benefits in addition to those received by regular retirement plans. This means that employers deduct a predetermined portion of pretax dollars from the employee’s wages to invest in the qualified plan. The contributions and earnings then grow tax-deferred until they’re withdrawn by the employee. That equals significant tax savings for both employers and employees.
Every business wants to both recruit and retain the best employees. A successful business with a solid growth plan is not enough; the culture and benefits must provide employees with the quality of life they desire. Investing in employee futures with a qualified retirement plan is a great way to reinforce this. Auto-enrolling employees in these retirement plans makes the process easier for them, and communicates the message that their employer cares about their long-term outcomes.
Qualified retirement plans provide clear outlines of when fund distributions can be made. Early distributions might be an option, but there may be associated taxes and penalties that must be clearly defined upfront. This reinforcement of transparency is part of the qualified plans, but reflects well on the employer since it takes a certain level of care to make these options clear, simple, and well mapped out for everyone.
The investment types allowed for qualified plans are limited and specified by each plan. Typically they include more conservative investment types including publicly traded securities as well as funds - from mutual through money market.
Qualified retirement plans offer a range of benefits for employers and their employees. Once you understand why qualified plans matter, the next step is to compare each of the available plan options and choose the one that best fits your business and employee needs. Learn more about Caldwell Trust and their retirement plan services for individuals and employers.