Part 4 401(k)s

The 401(k) plan has become a cornerstone of retirement savings in the United States.  Introduced in 1978, the 401(k) plan has evolved into a widely adopted retirement savings vehicle, providing numerous benefits for employees and employers.

Benefits for Employees:

• Tax Advantages: One of the primary attractions of a 401(k) plan for employees is the tax benefits it offers. Contributions to a traditional 401(k) are made on a pre-tax basis, meaning that the money is deducted from the employee's paycheck before taxes are calculated. This lowers the employee's taxable income, resulting in immediate tax savings.
• Employer Matching Contributions: Many employers offer a matching contribution to their employees' 401(k) plans. This means that for every dollar an employee contributes, the employer will also contribute a certain percentage, up to a specified limit. This employer match is essentially free money, boosting the overall retirement savings of the employee.
• Automatic Payroll Deductions: 401(k) contributions are typically deducted automatically from an employee's paycheck. This ensures a consistent and disciplined approach to saving for retirement, as employees don't have to actively manage their contributions.
• Investment Options: 401(k) plans offer a range of investment options, allowing employees to tailor their retirement portfolios to their risk tolerance and financial goals. Common investment options include stocks, bonds, exchange traded funds, and mutual funds.
• Portability: 401(k) plans are portable, meaning that employees can take their retirement savings with them if they change jobs. They can either leave the funds in the existing 401(k) plan, roll them over to a new employer's plan, or transfer them to an Individual Retirement Account (IRA).

Benefits for Employers:

• Employee Recruitment and Retention: Offering a competitive 401(k) plan can be a powerful tool for attracting and retaining top talent. Prospective employees often consider the retirement benefits offered by a company when making career decisions.
• Tax Deductions: Employers can deduct their contributions to employees' 401(k) plans. This provides a tax advantage for the employer, making it a cost-effective way to invest in their workforce.
• Increased Employee Productivity: Employees who are financially secure and have a clear path to retirement are likely to be more focused and productive in their work. The peace of mind that comes with knowing there's a robust retirement plan in place can positively impact employee morale and engagement.

There are a couple of additional items employers should be aware of before implementing a 401(k) plan:

• Fiduciary Responsibility: Employers have a fiduciary responsibility to manage the 401(k) plan in the best interests of their employees. This obligation ensures that employers act responsibly in selecting investment options, monitoring fees, and providing clear communication about the plan.
• Administrative Cost:  Compared to the other retirement plans we’ve discussed, the 401(k) plan is the most costly to maintain and has the highest administrative burden.

​As always, you should contact your tax/financial advisor before implementing any retirement plan.  If you would like our assistance choosing the right retirement plan for you, we’d be glad to help.

Disclosure:  Tax law is constantly changing due to new legislation, cases, regulations, and IRS rulings. Our Firm closely monitors these changes. Please call us before implementing any information discussed in this article, or if you need additional information concerning any item mentioned above. We will gladly assist you.

Part 3 SIMPLE IRAs

As small businesses seek to attract and retain talented employees, offering competitive retirement savings plans becomes increasingly important. One such option that has gained popularity is the Savings Incentive Match Plan for Employees (SIMPLE) IRA. This retirement savings plan is designed to be straightforward and accessible for both employers and employees, providing mutual benefits. In this article, we'll delve into the SIMPLE IRA, exploring its features and the advantages it offers to both employers and employees.

What is a SIMPLE IRA?

A SIMPLE IRA is a retirement savings plan specifically tailored for small businesses with fewer than 100 employees. It allows both employers and employees to contribute to a retirement account, fostering a simple and cost-effective way to provide retirement benefits.

Features of a SIMPLE IRA

• Employee Contributions: Employees can contribute a portion of their salary to their SIMPLE IRA on a pre-tax basis, reducing their taxable income.
• Employer Contributions: Employers are required to make contributions to employees' SIMPLE IRAs. They can choose between a dollar-for-dollar match of employee contributions up to 3% of the employee's compensation or a non-elective contribution of 2% of each eligible employee's compensation.
• Simplicity and Low Administrative Costs: As the name suggests, SIMPLE IRAs are designed to be uncomplicated, reducing administrative burdens for small businesses. This simplicity translates to lower administrative costs.
• Flexibility: The plan is flexible, allowing employees to choose how much they want to contribute within the annual limits. Employers can also adjust their contribution method from year to year.
• Immediate Vesting: Employees are immediately vested in all contributions, whether from themselves or their employer. This means that the funds in their account belong to them.

Benefits for Employers:

• Employee Attraction and Retention: Offering a retirement savings plan demonstrates a commitment to employees' financial well-being, making the company more attractive to potential hires and promoting employee retention.
• Tax Advantages: Employers receive tax deductions for contributions made to employees' SIMPLE IRAs, providing a financial incentive to offer this retirement plan.
• Ease of Administration: The straightforward design of the SIMPLE IRA reduces administrative complexity, making it easier to manage and maintain the plan.

Benefits for Employees:

• Tax Savings: Employees enjoy immediate tax savings as their contributions are made on a pre-tax basis, reducing their taxable income.
• Employer Contributions: Employees benefit from employer contributions, whether through a matching contribution or a non-elective contribution, which adds to their retirement savings.
• Easy Enrollment: Participating in a SIMPLE IRA is easy for employees.

The SIMPLE IRA can be a win-win retirement savings solution for both employers and employees. However, it may or may not be the best option given your business’s unique circumstances.  We recommend consulting a tax/financial advisor before beginning any type of retirement plan.

Disclosure:  Tax law is constantly changing due to new legislation, cases, regulations, and IRS rulings. Our Firm closely monitors these changes. Please call us before implementing any information discussed in this article, or if you need additional information concerning any item mentioned above. We will gladly assist you.

Part 1

Offering retirement benefits to your employees is something that is beneficial to you as the employer and to your employees as well.  In Part 1 of this article, we will delve into the reasons why your business should consider implementing a retirement plan and explore some common plans that may be suitable.  In the weeks that follow, we’ll get into more detail about each of the plans listed.

Why Implement a Retirement Plan?

1. Attract and Retain Talent: In a competitive job market, offering a retirement plan can set your business apart. Prospective employees often consider retirement benefits a critical factor when evaluating job offers. Providing such benefits demonstrates your commitment to your employees' well-being and future financial security, making your business an attractive option for top-tier talent. Additionally, a well-structured retirement plan can enhance employee loyalty and reduce turnover.
2. Tax Advantages: Implementing a retirement plan can offer tax advantages for both the business owner and employees. Contributions made to retirement plans are often tax-deductible for the business, reducing its taxable income. Furthermore, employees typically don't pay taxes on their retirement contributions until they withdraw funds during retirement, potentially resulting in lower taxes during their working years.
3. Employee Morale and Productivity: A retirement plan communicates to your employees that you value their long-term well-being. This can boost morale, job satisfaction, and overall productivity. When employees feel secure about their financial future, they can focus more on their roles, resulting in increased efficiency and improved workplace culture.
4. Business Competitiveness: Small and medium-sized businesses often find it challenging to compete with larger corporations in terms of compensation packages. By offering a retirement plan, you can help level the playing field and provide an enticing benefit that can rival offerings from larger enterprises, enhancing your business's overall competitiveness.
5. Personal Savings: Implementing a retirement plan not only benefits your employees but can also provide you, as a business owner, with an effective way to save for your own retirement. It's an opportunity to build your nest egg while helping your employees do the same.

Common Types of Retirement Plans for Small to Medium-Sized Businesses (not an all inclusive list)
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1. Simplified Employee Pension (SEP) IRA: A SEP IRA allows employers to contribute to a retirement account for each eligible employee. Contributions are made solely by the employer, and the contribution limits are generally higher than traditional IRAs. SEPs are easy to establish and have minimal administrative requirements.
2. SIMPLE IRA: The Savings Incentive Match Plan for Employees (SIMPLE) IRA is a straightforward plan designed for businesses with fewer than 100 employees. Both employers and employees can make contributions, and the employer matches employee contributions up to a certain percentage of their salary.
3. 401(k) Plans: While often associated with larger corporations, 401(k) plans have become increasingly accessible to small businesses. Traditional 401(k) plans allow employees to contribute part of their salary on a pre-tax basis, and employers can choose to match a portion of those contributions.

There are many factors to consider in determining which plan is right for your business. Give us a call and we’ll gladly help.

Disclosure:  Tax law is constantly changing due to new legislation, cases, regulations, and IRS rulings. Our Firm closely monitors these changes. Please call us before implementing any information discussed in this article, or if you need additional information concerning any item mentioned above. We will gladly assist you.

In recognition of the challenges posed by COVID-19, Congress introduced the Employee Retention Credit (ERC) to help businesses and not-for-profits retain employees during the pandemic, and these credits are still available today. This article will provide an overview of the ERC, including qualification criteria and the process for claiming the credit.

To qualify for the ERC, you must have W-2 employees, and meet either the gross receipts test or the full or partial government ordered shutdown test.

1.  Gross Receipts Test:

• For 2020, compare gross receipts for each quarter in 2020 with the corresponding quarters of 2019.  If there is a more than 50% decline in gross receipts, you may qualify for that quarter.
• For 2021, compare gross receipts for the 1st, 2nd, and 3rd quarters of 2021 with the corresponding quarters of 2019.  If there is a more than 20% decline in gross receipts, you may qualify for that quarter.

2.  Government Ordered Shutdown Test:  If your business or not-for-profit was subject to a full or partial government ordered shutdown due to COVID-19, you may qualify for the time in which you were fully or partially closed.  

Calculating the Credit:  The Employee Retention Credit is calculated based on qualified wages paid to eligible employees during the eligible period. 

For 2020, the credit is equal to 50% of qualifying wages, with qualifying wages being capped at $10,000 per employee for all of 2020.  Therefore, the maximum credit for 2020 is $5,000 per employee. 

For 2021, the credit is equal to 70% of qualifying wages, with qualifying wages being capped at $10,000 per employee per quarter in 2021 for the 1st, 2nd, and 3rd quarters.  The maximum credit for 2021 is $21,000 per employee ($7,000 per employee per quarter for Q1, Q2, and Q3).

Claiming the Employee Retention Credit:  To claim the employee retention credit, an amended payroll report must be completed for each affected period (Form 941-X for general employers and Form 943-X for farmers).  The amended payroll form will be filed with the IRS to request the credit.  For the 2020 credit, the deadline is April 2024 and April 2025 for the 2021 credit.

The information contained above is a general overview of the ERC, a full description of which is beyond the scope of this article.  Calculating and applying for this credit can be complex and we encourage you to contact our office before doing so.  We have reached out to many of you regarding the Employee Retention Credit and still plan to reach out to many more.  If you haven’t heard from us yet and are interested to see if you qualify, please give us a call.  

Disclosure:  Tax law is constantly changing due to new legislation, cases, regulations, and IRS rulings. Our Firm closely monitors these changes. Please call us before implementing any information discussed in this article, or if you need additional information concerning any item mentioned above. We will gladly assist you.