Employee Retirement Incentives and Retirement Plan Options

Employee Retirement Incentives and Retirement Plan Options
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Basics of Retirement Incentives

More and more employers are offering one or more retirement packages to employees. These employee retirement incentive packages help employers retain strong talent and develop a sense of loyalty with employees. Most plans require a minimum number of years of services to qualify for the plan and allow employees to create retirement savings accounts that receive tax advantages, both presently and in the future. When employers offer more than just an opportunity for employees to defer income, but actually make matching or non-elective contributions, employee loyalty and production often increase.

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Types of Employee Retirement Packages

The types of retirement packages available to employees is somewhat contingent to the type of company and its size. Some of the most common are:

  • 403(b) Annuity
  • 457(b) Deferred Compensation Plan
  • 401(k)
  • Simplified Employee Pension

Non-profit organizations and certain government entities may offer a tax-sheltered annuity, sometimes referred to as a 403(b) plan. These plans include employee-elected salary reductions and allow employer contributions if the employer chooses to from the start. Choices will be contingent on the size of the company and the costs of the plan.

Another plan that can be offered by government entities is the 457(b) plans, also known as a Deferred Compensation Plan. This plan is not an employee-elected plan but places up to 15 percent of employees’ annual income into an account on their behalf. It works similarly to a private corporations profit sharing pension plan.

Corporations, large and small, are able to offer 401(k) plans, with many small companies offering Simplified Employee Pensions (SEP IRAs). A 401(k) works similarly to a 403(b) with employee-elected contributions plus the option for employers to match or make non-elective contributions. SEP IRAs on the other hand do not allow employees to make contributions, but employers are able to contribute up to 25% of employees’ annual compensation into the account.

Why Are There So Many Types of Retirement Plans?

Simply put, the IRS likes to keep things interesting. All kidding aside, the reasons for setting up one type of a employee retirement incentive package depends on the size of the company, the tax benefits to the organization for certain contributions, and the amount that employees can have placed into a tax-deferred account on an annual basis.

Non-profit organizations may not be able to pay employees as much as a large corporation, but are able to help employees save more for retirement with larger annual limits in 403(b) plans. These plans also let employees who have been with the organization past the age of 50 to access the money in the plan starting at age 55, almost five years sooner than the standard 59 ½ years of age.

How Do Incentive Plans Benefit the Company?

The cost of administering these plans is a tax-deductible expense, but it is still an expense. So why would employers fund plans with such large amounts of money going out? Loyalty and productivity. When employees feel that an employer has provided them with a benefit they didn’t need to, company loyalty increases and morale increases. This often makes staff and managers more productive. Some retirement savings plans are designed on profit sharing programs as well, giving further incentive to employees to do a good job because they will get a piece of the pie at the end of the day.

When shopping for a retirement savings plan for your company, shop around and speak with several plan administrators to find the right plan for your company needs. Getting more than one quote helps whittle through the differences in set-up fees, administrative fees, and the performance of investments. Review everything with your tax advisor before enrolling in any plan. This ensures that the company will not over-extend itself in offering an employee retirement incentive plan.