"This individual is a multiyear experienced person in developing software applications using some high-end development tools and is very conscious of security. He's not a risk-taker in any fashion, but is very aware of his financial situation," Herczeg says. "We could offer him compensation equal to where he is, but the 401(k) or the benefit-type plan was a security blanket for him which we did not have."
It's not the first time Herczeg has seen the issue arise.
He recently interviewed a woman who had computer science and engineering degrees from Washington State University but no work experience outside her academics. One of her first questions to Herczeg was whether his company offered retirement benefits.
"Those things come up," he says. "If you don't have those things to offer, you can say, 'We have a lot of fun here; do you want to come?' That doesn't hold water a lot of times."
He understands these candidates' concerns.
"I was fortunate enough to be involved with employers that had [a retirement plan], and it allowed me to have the security blanket to start my business," he says.
Herczeg now is taking steps to add retirement benefits to the health and life insurance he offers the six employees of his own 5-year-old business.
To avoid a complicated, expensive solution to his problem, he's opted for an individual retirement account plan called SIMPLE, an acronym for Savings Incentive Match Plan for Employees.
Choosing the SIMPLE route
Herczeg spent about two months researching his options for an employee retirement plan and sought the assistance of Lewis Shore, CEO of Shore Financial Services in Worthington.
Before choosing the SIMPLE plan, Herczeg also considered using a 401(k) plan through his payroll administrator, ADP, or turning over his human-resources functions to a professional employer organization, such as Team America, who would then provide these benefits.
Neither seemed to offer a dramatic difference in employee benefits from that provided by Shore, Herczeg says.
The SIMPLE plan, established as a provision of the Small Business Job Protection Act of 1996, seemed like his best option. Mike Barrett, a financial planner with Shore Financial, says SIMPLE plans, available only to employers with 100 or fewer employees and who have no qualified retirement plan already in place, have created an option for employers, like Herczeg, who might not previously have been able to offer such benefits to their employees.
"A lot of companies couldn't even think about doing this under the old law, because with fewer than 100 employees, the administration is costly for a regular 401(k)," Barrett says. While Barrett says the variables for the 401(k) plan make it too difficult to generalize the exact costs, the SIMPLE IRA administration is less costly because there is no special plan-level tax reporting for the employer each year and there is no need to track vesting because all contributions are immediately 100 percent vested.
Among the other pluses of the SIMPLE plan:
- Potential for more employee participation. Any employee who has earned at least $5,000 from the employer in two prior years and is expected to earn $5,000 in the current year can participate. Employers could include more employees by reducing the compensation limit or the two-year requirement, Herczeg points out.
- Unlike traditional 401(k) plans, there are no so-called discrimination tests that could prevent higher-paid executives from contributing, Barrett says. In 401(k) plans, guidelines are set up so that highly compensated individuals can't contribute differently with regard to the majority of employees, who are not highly compensated.
- No complex IRS reporting. "Employees' deferrals are reported on W-2 forms, and that's it," Herczeg says. "ADP can do that for us on our tax filing."
"Employers can put dollars away in the plan and it's totally deductible for them," Shore says, noting another key benefit of using the SIMPLE plan.
- Flexible employer contribution. Herczeg could consider two options. He could set a nonelective contribution by the company-made regardless of whether the employee contributes-of the lesser amount of either 2 percent of each employee's annual compensation or $3,200 per year, Barrett says. He also could match each employee's deferral dollar-for-dollar up to 3 percent of the annual compensation, contributing as much as $6,000 per year.
Herczeg says Core likely will use the matching capability so, if the company has a down year, he can change the percentage match-an option he considers important for any small business.
"We chose not to go after investment capital or bank financing to start our business. It was based on selling something and rolling the profits back in," he says. "We're pretty frugal in leveraging ourselves and having all the options that we can. The idea is the employees can participate in the 'up' years, too."
He could, under this option, reduce his company's contribution to as low as 1 percent for two of any five years during the plan.
Employees, Barrett says, can defer up to $6,000 per year of their wages on a pretax basis.
Investing in the future
Herczeg says he also liked the choices of investment options available through the SIMPLE IRA. They include no-, low- and high-risk funds.
"Employees can distribute their own funds according to their needs and risk level and can change them using an 800 number," Herczeg says.
"It did seem to reduce our fiduciary liability, as well, because our employees are directing the money that they're putting away in investment accounts," Herczeg says. A company owner or CEO is normally the trustee of any retirement plan offered and, thus, has fiduciary liability to invest wisely, Shore says. By letting employees choose from a number of different funds and allowing them to control those investments, Shore adds, the employer has less liability.
The SIMPLE plans do not, Barrett says, allow loans or hardship withdrawals. Any withdrawals from the plan are permanent. If employees withdraw money during the first two years of the plan, they face a 25 percent penalty. A 10 percent penalty is enacted for any withdrawal made after the second year of investment but before the employee reaches age 59.5.
Herczeg says the plan will cost him less than $1,000 a year to set up and maintain.
The investment, a small portion of his company's $1 million to $3 million in annual revenues, is worthwhile, he says.
"I would be doing this even if I had less than a million in revenue, because it's going to allow us to attract the talent to grow," Herczeg says, adding that he will continue trying to bring on the talent he lost because of his previous lack of retirement benefits. "You can only get so much work done with X number of people."
Shore says the added benefit just gives employers a competitive edge.
"It certainly helps attract and maintain employees as far as a benefit because there are a lot of employers that have compensation-benefit plans," he says.
In all, Herczeg says, the SIMPLE plan was his choice because it is, frankly, simple.
"We're trying to do software," Herczeg says. "We're not trying to get Ph.D.s in all the things we need with benefit administration."