Businesses see benefits of retirement plans

The Stockton company prides itself on offering competitive employee benefits, but company officials knew the business couldn’t afford to offer a full-blown pension.

“Being a smaller company, and in today’s environment, it’s just prohibitive to really go with what they call a defined benefit plan,” said Chief Financial Officer Bill Chy.

A 401(k) plan was the perfect fit, Chy said.

Superior Gearbox Co. isn’t alone in its 401(k) efforts.

Forty-four million American workers – 90 percent of all American workers with retirement benefits – have 401(k) accounts, according to Ed Ferrigno, vice president of Washington affairs for The Profit Sharing/401(k) Council of America.

“You’d be hard-pressed to find an employer that offers a retirement plan that doesn’t offer a 401(k),” Ferrigno said.

The employer’s perspective

401(k)s may be mostly an employee benefit, but they can help employers as well.

Firms can earn tax breaks for company contributions to the plan. 401(k)s, like all benefits, improve employee moral and help lure top-notch workers. Also, business owners and executives can use 401(k)s to save for their own retirement needs.

From an employer’s perspective, 401(k)s are better than old-fashioned pensions, according to Troy Kennedy, senior vice president of Springfield Trust Co.

With pensions, he said, employers are on the hook for guaranteed retirement payouts.

That’s been a problem for Ford and General Motors. Both companies have large groups of retirees drawing pensions, even though sales and profits have sagged.

And seeing those struggles has reinforced Superior Gearbox’s position that a 401(k) is the way to go for employees.

“The big guys are having trouble with it, so it made sense that it wasn’t something that was useful for us,” Chy said.

With 401(k)s, though, the payout is based on how much the employee and employer contribute to an account, but employers aren’t obligated to continue contributions if their companies hit rough financial waters.

“You put the money in, and when the person reaches retirement age or some other point where they’re able to take distribution, they get what they get,” said BKD LLP associate Jared Scott.

Both pension and 401(k) contributions are tax deductible. Contributions are like any other business expense.

Tax breaks aren’t dollar-for-dollar, though. A company, for example, may save $15,000 on taxes if it contributes $50,000 to its employees’ 401(k) accounts, depending on the company’s tax bracket, said Jim Lewis, tax shareholder with Kirkpatrick, Phillips & Miller CPAs PC.

401(k)s present a multitude of administrative options, so it’s best for a business owner to make a date with a financial professional to come up with a plan.

“The design of the profit-sharing plan allows for a lot of flexibility,” Lewis added.

Work-based retirement plans

401(k)s came about in 1981 from a section of the Internal Revenue Code. They are work-based retirement benefit plans that allow workers to defer taxes while saving for retirement.

They are often part of a profit-sharing plan where a company matches employee contributions.

Employees who have access to 401(k) plans can make annual contributions to tax-deferred accounts.

For individuals younger than 50, the current limit is $15,000 per year; for those 50 and older, the limit is $20,000. And as employees save for retirement, the company saves on taxes through its matching contributions.

At Superior Gearbox Co., employee participation rates have varied during the last eight years, Chy said, but it’s currently pretty popular.

“Absolutely, it’s a positive thing,” Chy said. “We’ve got to offer something like this.”

Which to choose?

There are two main types of 401(k)s: Traditional and Safe Harbor.

Traditional

Traditional 401(k)s are best suited for small businesses with irregular earnings that can’t support a plan with required contributions.

Advantages: Employers aren’t required to contribute to the plan unless most of its contributors are highly compensated executives. Employers wishing to contribute have the choice of making a matching contribution, profit-sharing or a flat-dollar contribution. Employees have the advantage of contributing pretax dollars to their accounts, which are vested immediately. The 401(k) plan allows for the highest permissible employee deferral of income and the highest catch-up contributions of all the plans.

Disadvantages: Administration costs are the highest of all the plans and require the most complex testing. In addition, the employer must file an annual tax return for the plan.

Safe Harbor

Safe Harbor 401(k)s are best suited for employers with consistent earning streams that can support a plan with annual required contributions. This is an attractive alternative for a business that wants the benefits of a 401(k) plan but does not want to – or is not able to – satisfy the required annual compliance testing. It’s a very good option for family-based businesses that can meet the required criteria.

Advantages: Offers all the benefits of traditional 401(k) plans, but does not require mandated testing. Can be set up just 30 days in advance of the new plan year.

Disadvantage: Required annual contributions are the premise of this plan, so it is not a good option for employers that do not have consistent earnings.

Source: American Institute of Certified Public Accountants