8 Tax-Efficient Retirement Plans for Your Business

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The first priority of every business is making a profit.  And unless you’re a sole proprietor, your workforce is one of the keys to achieving this goal.  Every business works hard to attract and retain quality employees, and every business has to find ways to keep the employees both productive and happy.

In today’s economic environment, employee surveys have shown that after health insurance, a retirement plan is the thing more employees want from a job than anything else, ranking even above the opportunity for advancement.  A retirement plan encourages employees to save systematically for their futures, and in the case of some plan options, can also offer significant tax benefits for you, your business, and your employees.

Qualified retirement plans offer significant tax advantages to both employers and employees.  Employers are generally permitted to deduct their contributions on their federal income tax returns, while employees can benefit from pretax and after-tax contributions, and tax-deferred (and in some cases, tax-free) growth.

The following are some of the most popular retirement plans for your business and for your tax planning:

  1. The 401(k) Plan: The 401(k) plan is a qualified defined contribution plan in which employees may elect to defer the receipt of income.  The amount deferred (maximum $19,000 and $25,000 if you are 50 or older for year 2019) consists of pretax dollars that are invested in the employee’s plan account. The employer may match all or part of the employee’s deferrals as a mean of encouraging employee participation in the plan.  The 401(k) plan is the most widely used retirement plan today.
  2. The Profit-Sharing Plan: A profit-sharing plan is a qualified defined contribution plan that in general gives the employer more choice about how much to contribute to the plan each year. In some years, the employer may choose to make no contribution at all. The amount of contribution is based on a written formula in the plan document, or may even be at the employer’s discretion. In typical profit-sharing plans, the employer’s contributions range from 0 to 25 percent of an employee’s annual compensation or $56,000 for year 2019 whichever is lower.
  3. The Age-Weighted Profit-Sharing Plan: An age-weighted profit-sharing plan is plan in which the employer’s contributions vary based on the age of the plan participants as well as on their level of compensation. This type of plan benefits older participants – those who are generally closer to retirement age – by allowing the employer to make much larger contributions on their behalf than to the accounts of employees who are much younger.
  4. The New Comparability Plan: A new comparability plan is a variation of the traditional profit-sharing plan.  With this type of plan, employees are divided into two or more classes, generally based on age, but often on other factors as well.  A new comparability plan allows businesses to maximize contributions made to higher-paid employees while minimizing contributions to other employees.
  5. The Defined Benefit Plan: A defined benefit plan is a qualified retirement plan that guarantees an employee a specific level of benefits at retirement.  As the name suggests, it is the retirement benefit that is defined, not the amount of contribution that must be added each year.  Most plan sponsors employ an actuary to determine the annual contributions that will be required to support the expected retirement payout.  Contributions may vary from year to year, depending on the performance of the underlying investments into which the contributions have been placed.  Defined benefit plans allow for a higher level of employer contribution than most other types of plans, and are generally most appropriate for large companies with a history of consistent earnings or smaller companies with few young employees. Employees make no contributions to defined benefit plans; these plans are solely funded by the employer.
  6. The Cash Balance Plan: A cash balance plan is a type of qualified retirement plan that has become increasingly popular in recent years.  Though it is technically a form of a defined benefit plan, the cash balance plan is often referred to as a “hybrid” because it combines some features of both types of plans.  Like traditional defined benefit plans, cash balance plans pay a fixed amount of retirement benefits.  But, like defined contribution plans, each participant has an individual account for recordkeeping purposes.
  7. The Simplified Employee Pension (SEP): A simplified employee pension plan is a tax-deferred retirement savings plan that allows contributions to be made to special IRAs called SEP-IRAs.  Typically, an employer with one of more employees can establish a SEP plan.  A SEP plan allows the employer to make tax-deductible contributions for himself and for his employees, if there are any.  With a few exceptions, SEP-IRAs are identical to traditional IRAs with $56,000 contribution limit for year 2019.
  8. The SIMPLE IRA: A SIMPLE IRA is a retirement plan for small businesses (generally those with fewer than 100 employees) and for self-employed individuals.  The SIMPLE IRA plan is funded with voluntary pre-tax employee contributions and with mandatory employer contributions.  The amount of annual contributions ($13,000 and $16,000 if you are 50 or older for year 2019) that are allowable under the SIMPLE IRA are much higher than those for traditional and ROTH IRAs, but are lower than those for 401(k) plans.

Retirement plans are great for your tax return and for your employees moral but finding the right plan isn’t always easy.  The qualified CPA or a CFP can provide your appropriate guidance to select the right plan for your corporation or for yourself. We have advised on the thousands of such plan designs. Please feel free to contact us at customercare@beamalife.com or (877) 972-3262.

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