Page 22 - BusinessWest January 23, 2023

Saving Grace
How to Attract Employees with the Right Retirement Plan
BY BARBARA TROMBLEY, CPA
“Other than wages and healthcare, how can you make your business more attractive to a potential worker? Often, a retirement plan is the answer.”
With a labor shortage and looming recession, attracting the right employee is more important than ever. Many small businesses are struggling to find qualified candidates.
Other than wages and healthcare, how can you make your busi- ness more attractive to a potential worker? Often, a retirement plan is the answer.
With the absence of traditional pensions today, the onus for retirement is on the employee. Many small-business owners may feel a personal responsibility to enable their employees to fund a retirement. Not having one at all can certainly be a deal breaker for many applicants.
The ability to save, directly from a paycheck, is very attractive. But what plan should you offer, and what are the costs? What are the benefits of the different types of plans?
The most common type of plan is a 401(k). You need only one employee to set up a 401(k). The biggest advantage to this plan is the high level of salary deferrals that it allows. The limit for 2023 is $22,500 with a $7,500 catch-up contribution for those over age 50. Many plans can offer both pre-tax contributions and post-tax (Roth) contributions. There are many investment choices that are possible in a 401(k) plan. Also, many plans are associated with a financial advisor who will offer education to your employees, possibly helping them save more for retirement.
One drawback is that a 401(k) plan can be one of the more expensive types of plans to set up and maintain. The plan needs to be either a safe-harbor plan, where the employer must make
a specified matching contribution or automatically deposit 3% of the employee’s salary into the plan (any contributions made by the
employer are tax-deductible), or the plan needs to be tested each year to ensure that the plan does not discriminate against highly compensated employees.
In the past, this type of plan had to be offered to all employees over 21 years of age who work at least 1,000 hours. The rules are changing to allow some part-time workers to participate. In my opinion, a 401(k) plan is the most advantageous plan to the employ- ee but may cost the employer more in administration, setup fees, and safe-harbor contributions compared to other plans.
Another popular plan for employers is the SEP plan. Again, this plan can be offered by businesses with more than one employee. The main difference between the SEP plan and a 401(k) is that SEP contributions are made only by the employer; there are no employee contributions. This type of plan is very simple to set up and does not have testing requirements. The maximum annual con- tribution is 25% of salary, up to a limit of $66,000. The employer has to make the same percentage contribution for each of his or her employees.
The benefit of this plan is that it is very simple to set up; the drawback to the plan is that the business owner needs to make all of the contributions, which may not be economically feasible. As an advisor, I often see a solo business owner having this type of plan.
What if a business owner does not want the complexity and costs of a 401(k) and does not want to fully fund a retirement plan like the SEP? A Simple Plan
may be the answer. A Simple
Plan can be offered by a busi-
ness with fewer than 100
Plans
>>
Continued on page 24
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