Employers face many challenges when it comes to attracting and retaining qualified employees. Providing a valuable retirement package in the form of defined benefits and/or defined contributions may help an employer to garner the additional skill sets they need and entice employees to their organization.
For many employees, retirement has become known as the "golden decades". Many employees are living well into their 90s. For retirees, there are three legs to retirement income sources — social security, personal savings and employer-provided retirement plans. The need for an additional income source beyond personal savings and social security can enable a retiree to maintain a standard of living with some dignity and respect.
As a business owner, your reasons for implementing a qualified retirement plan go far beyond securing federal income tax benefits for the business. Qualified retirement plans can help your business to recruit high-quality employees, retain their services and enhance good employer-employee relationships.
When it comes to attracting and keeping good employees, a firm with a qualified retirement plan can be at a distinct competitive advantage to those without these types of plans. More importantly, businesses with qualified retirement plans may deduct plan contributions off their taxes as a necessary and ordinary business expense. So in essence, through this tax deduction, the government is subsidizing your qualified plan benefit expenses.
Qualified Plans
Qualified plans, such as 401(k) and 412(i) plans, adhere to IRS regulations about eligibility, employer contributions, employee withdrawals, and withdrawal tax consequences. A company must also meet strict federal rules for nondiscrimination to ensure that the plan benefits all eligible employees.
If a company and its plan meet these provisions, the company can deduct contributions it makes to the plan; if it fails to meet them, the company risks losing its tax benefits for that year's contributions, or the plan itself may be disqualified. The company may have to file a separate tax return for the plans. Qualified plans are protected by law, so business creditors cannot access the funds to collect debts.
In profit-sharing plans, employers contribute a certain percentage of the total plan payroll.
Profit-sharing plans can be one of the easiest and most basic qualified retirement plans to establish and are popular because they give the business owner flexibility in deciding how much to contribute for each participating employee annually, from 0-15% of the total plan payroll. There are different types of profit sharing plans to choose from, including, traditional age-based or new comparability.
Withdrawals prior to age 59 ½ may incur a 10% IRS tax penalty.
*corporation receives corporate tax deduction when paying for Life Insurance premiums in Profit Sharing Plan
401(k)
Employer-sponsored 401(k) plans provide one of the easiest and most effective ways to save for retirement. Contributions are automatically deducted from your paycheck and deposited into your 401(k) account. This important benefit can play a large part in helping to plan for your retirement.
Your 401(k) plan has built-in flexibility to meet your changing financial circumstances. You can increase or decrease your contributions, as your plan allows, or stop them, at any time. You choose your investments, and you have the option to transfer money among your investment options, as your plan allows.
Your contributions are deducted from your paycheck before taxes are deducted. You pay less in current income taxes than you would if you had to pay the tax first and then try to save. Plus, your earnings grow tax deferred until you withdraw your money. Tax-deferred compounding has the potential to help your account balance to grow faster than a taxable savings account, because all of your earnings are reinvested without being reduced by current income taxes.