Retirement plans for a person are valuable benefits that impact both the present as well as future lives of the employees. However, offering retirement benefits to an employee can be a complicated process. As such, it is essential to understand the pros and cons of the process of providing retirement benefits. Here we bring to you precisely that information, with additional info about types of retirement benefits and the goals an employer would like to accomplish by offering retirement benefits.
Why should an organization provide retirement benefits?
Offering excellent retirement benefits for an employee can be useful for small companies who strive to attract and retain the right talent and skilled professionals. Some of the reasons are:
- Around 75% of the employees expect their employees to provide better retirement benefit pension plans. Employers who stay out of giving retirement benefits misses the real talent and suitable candidates.
- 60% of people would instead opt for a job with lower pay but excellent retirement benefits. Smaller companies don’t need to match salaries with large corporations. All they need is the right employee benefits and good perks at work, which will automatically earn talent.
- 37% of the candidates declined job offers because they didn’t get excellent retirement benefits as per their expectations. Give a good job offer with better retirement benefits for employees and show that you value them. A weak package would lose out the best of the lot.
- 40% of the employees stated that increasing and boosting their retirement benefits package was the one factor that is keeping them associated with the organization and in the job. Offering better retirement benefits will appeal to the employees and make them stick to an organization for long.
Offering retirement benefits to employees is a remarkable way of increasing the profits of the compensation package of a company. The employees are encouraged to plan and invest for their retirement and future by plans set-up at work. For smaller businesses, offering retirement benefits help the employee to take advantages of the retirement plans for themselves.
Retirement Benefits: Pros and Cons
Some of the pros of offering retirement benefits to employees include:
- The organization can receive proper tax advantages for the business.
- If the retirement plan is based on profits, the policy will encourage employee motivation as well as their productivity.
- Retirement benefits will give an added recruiting advantage to the organization.
- If a business incurs higher start-up costs or has little cash in hand, the organization can use the retirement plan to supplement the compensation package of an employee.
- The plan also can be used by the employer for their retirement.
Some of the cons of offering retirement benefits to employees include:
- Planning and implementing retirement benefits are time-consuming, complicated, as well as costly.
- Providing retirement benefits and plans require thorough professional assistance, which is too expensive.
An employer must take up professional advice as well as guidance for offering retirement benefits to employees. The pension rules are complicated, and tax-related basics of retirement benefits can confuse an employer. As such, professional guidance is necessary. Before the employer consults with an accountant or a tax advisor, it is essential to understand the basic kinds of retirement benefit plans.
Understanding the Basics of Retirement Benefits Plan
The pension plans for employees are either qualified or non-qualified kinds. The qualified plans for retirement benefits have the following characteristics:
- The income that is generated by the qualified plan assets is not subjected to income tax. This is because the revenue is generated and handled within the framework of a proper and efficient tax-exempt trust.
- The employer is subjected to a current tax deduction for making contributions to the retirement benefit plan.
- The participants of the qualified plan need not pay any income tax on the amounts that are contributed on their behalf till the year the funds are evenly distributed to them by their employer.
- As per the favorable circumstances, the beneficiaries of qualified plan distributions earn special tax treatment.
Non-qualified retirement benefit plans are those who do not earn preferential tax treatments. These plans are usually designed to give deferred compensation for single or more executives in an organization. Small businesses and organizations typically opt for the qualified retirement benefit plan as they provide tax advantages to the employer. The retirement benefit plans are furthermore divided into broad categories of a defined benefit and contribution plans as well as hybrid plans.
Qualified Retirement Benefit Plan
Qualified retirement benefit plan needs to fulfil specific guidelines to be useful for the employee and the employer. It must be permanent- which means it cannot have a planned and definite expiration date. The employer has the right to change as well as terminate the qualified retirement benefit plan or even discontinue operations; thereby abandoning the policy restricting it for only business requirements. This will make it clear that the qualified plan was never a bona fide program from its implementation.
The qualified plan should be a properly written program communicated to all the employees of the organization, and the plan assets to be hoarded by the trust by one or more trustee members. The qualified plan should be solely for the exclusive benefit of the organization’s employees as well as their beneficiaries. There is also no reversion of the assets of the trust to the employer, whatsoever. The qualified plan should be established and maintained solely by the employer, with funding for the same be provided by the employer or employee contributions, or a combination of both.
- Participation Rules: A qualified retirement benefit plan has to meet the required standards of participation, with the least percentage of the lesser compensated employees should be covered by the plan, with a definite number of them involved in the plan. The plan should never discriminate in favor of the employees, be it officers, shareholders, or any highly compensated employees, either by contributing more significant sums on their behalf or offering them with better retirement benefits. The plan though can condition the eligibility factor based on age and service. Still, usually, it cannot postpone participation beyond the birth date when the employee attains the age of 21, as well as the time when the employee reaches a year of service.
- Vesting Rules: Vesting is the process where attaining a non-forfeitable right to the money is kept aside, meaning the employer will have to stick around it to obtain full benefits of the plan. There are two different vesting methods:
- A five-year cliff vesting period where the participant transfers to being fully vested after five years of service.
- Or a seven-year gradual vesting period in which the participant obtains supremely fixed after three years of the service period.
Although the employer can enjoy lenient vesting rules, these rules cannot be bent for anyone. An employee should be not later than the mentioned retirement age in the benefit plan. The plan should also mention the rules on how the breaks in service affect vesting rights.
- Required annual summary: The employer is required to submit a document each year titled ‘Summary Plan Description’ where details of pension benefits, the amount of the pension, the requirements of the payments and the conditions are specified for the participants.
- Integration with Social Security: Most businesses include a Social Security plan on pension schemes. This inclusion reduces the employer-provided pension benefits by a percentage that is integrated into the Social Security benefit. In specific cases, the employers might argue about supporting both the pension schemes as well as the social security program for the employees. However, although the law denotes a certain percentage of integration, an employee must be provided least of 50% of the pension amount the person earns when Social Security benefits are merged with the pension.
Non-Qualified Retirement Benefit Plan
Non-qualified plan means it is not subjected to any federal pension law provisions. As a result, the no-qualified retirement benefit plan doesn't attain as many tax breaks like the regular pension plans.
- Top-hat plans: This is a non-funded plan which is maintained by an employer to provide any deferred compensation to a specific group of management or highly compensated employees.
- Rabbi trusts: This is a non-qualified deferred compensation arrangement where the pension amounts are transferred directly to an irrevocable trust that is managed for the benefit of executive employees.
- Golden parachutes: This is an agreement between the companies and the key professionals. Under this arrangement, the organization agrees to pay the professionals a certain amount, often higher than their average compensation amount, in case the control of the organization changes.
- Golden handcuffs: This is an arrangement between the organizations and their primary executives wherein the executives are offered supplemental retirement benefits on fulfilling certain conditions, like being associated with the company until a particular age. Golden handcuffs are specially designed to encourage long-term efficient relationships with the employees.
Non-qualified plans are different from the qualified plans; however, they are apt for smaller businesses. A company may want to offer supplementary benefits for primary executives or employees or might want to defer any payment in future.
For example, if a company wants an employee to remain for a longer or significant number of years with the organization, the employer can introduce the golden handcuffs. The employer can present deferred compensation benefit plan, which would give additional compensation to the employee on completion of the significant years of service. These goals cannot be achieved through a traditional retirement plan as the laws of a country requires the employer to provide minimum benefits for the employees and don’t discriminate between the employees.
The present job market is a field with a lot of competition and retirement benefits is one factor that can create a stronger compensation package for the employees and attract them for the work. An organization can earn top performers by the best retirement benefits in the market. Candidates always look out for retirement benefits, and a majority of organizations do offer them. If a company forgoes this essential retirement benefit, the company will lose a talented lot.