Offering your employees a tax sheltered retirement plan makes sense
on multiple fronts. Not only will such a plan encourage employees to save for
their retirement while providing several
tax advantages for both you and your staff
members, but it also helps recruit and
retain good workers.
“One of the biggest challenges in business today is attracting and retaining the
best people,” points out Carl Pon, co-managing partner of Vicenti, Lloyd & Stutzman
LLP. “A tax sheltered retirement plan can
help a great deal with this challenge.”
Smart Business spoke with Pon about
tax sheltered retirement plans, the benefits
they provide and the importance of keeping employees in the loop.
What type of tax sheltered retirement plans
are there?
There are two basic types: defined-benefit plans and defined-contribution plans.
With a defined-benefit plan, retirement
benefits are paid to employees based on a
formula and the participants receive this
set amount for the rest of their lives upon
retirement. These types of plans, however,
are a vanishing breed. A defined-contribution plan is where employees have individual accounts that grow based on their contributions to the plan.
Tax sheltered retirement plans are also
known as qualified retirement plans, which
means they qualify for these special tax
treatments. In addition, there are nonqualified retirement plans, but these are usually
used only for key employees and owners of
a business.
How can these plans serve as tax shelters?
They provide three basic types of shelter.
First off, they provide a tax deduction for
the business, which provides current tax
savings. Secondly, the investments inside
the plan are sheltered from income tax.
Thirdly, the employee is sheltered from any tax on what goes into the plan until they
take the money out of the plan.
The business has to legally adopt the plan
and communicate it to its employees. Once
that is done, the company needs to put
money into the retirement plan trust. Then
those funds are invested so that they can
grow to provide greater benefits.
How can a company benefit from using these
types of plans?
Getting and keeping good people is the
major benefit. It can also provide significant benefits to the owners of the business.
Finally, the assets inside the retirement
plan are usually protected from any creditor claims.
One of the challenges is explaining the
benefit to the employees so that they can
understand and appreciate the value of it.
Also, there are some administrative challenges in terms of communicating and continuing to educate the employees on what
is going on inside the pension plan. It’s particularly important with 401(k) plans
where employees may have to agree to
have some money taken out of their own paycheck to go into the pension plan, and
where they make their own investment
decisions.
Ideally, a company should have a kickoff
meeting to explain the benefit to its
employees. Then human resources should
have a one-on-one meeting with all new
employees who join the company. Also, it’s
a good idea to have quarterly meetings
where your plan’s investment adviser
comes in and explains to your employees
what has been going on in the investment
markets so that they can make good choices in directing their investments.
What steps should a company take to get
started with a tax sheltered retirement plan?
The first step would be to talk with your
financial advisers about how this would
work for your organization in light of all
the other compensation packages you
have. The plan should fit with the strategic
direction of your company, and the exit
plan of the owners as well.
Why would a company not want to do this?
There is a measure of fiduciary liability
that goes to the managers within the company who are overseeing the operation of
the plan. Another concern is that sometimes employees don’t perceive there to be
value to the plan. Also, sometimes employees can develop a sense of entitlement —
the expectation that money will go into the
plan regardless of how the business is
doing. Finally, there are the administrative
challenges. All in all, however, I believe
that most of the time the good outweighs
the bad in terms of the challenges and benefits that a tax sheltered retirement plan
can present.
CARL PON is co-managing partner of Vicenti, Lloyd & Stutzman
LLP. Reach him at [email protected].
