Retirement Planning
Employer Retirement Plans
Retirement plans offer a number of benefits. A typical plan provides participating employees the opportunity to systematically save for retirement. From the employer’s point of view, having a retirement plan can maximize the business’s profitability by helping to attract and retain quality employees, and by boosting employee productivity. In addition, retirement plans can provide significant tax advantages for both employer and employees.
If you are self-employed or involved with a small business (e.g., a partnership or sole proprietorship), establishing a retirement plan can provide benefits for you as well as any employees you may have. As you know, however, small businesses and self-employed individuals have considerations very different from those of large employers. The best retirement plan for a large corporation may not be the best one for a small business with a few employees. Certain types of retirement plans are generally considered more appropriate for small businesses and self-employed individuals.
Qualified retirement plans can be divided into two main categories: defined benefit plans and defined contribution plans. In today’s environment, most new employer-sponsored retirement plans are defined contribution plans.
A Strategy for Competing Nonqualified Plans
Concern
Success in today’s economy takes more than your vision; it also takes talented and committed employees. Ask any business owner and they will tell you the hardest part of building and running a successful business is attracting and keeping good employees. As a result, the competition for talented employees is fierce. Today’s business owners need to offer complete and attractive compensation packages in order to recruit and retain talented employees.
Solutions
Today’s employers need to take a new look at traditional solutions. Nonqualified plans can help make any compensation package more attractive. Companies need innovative compensation and benefit plans that can work for one executive or for the whole management team. Above all, employers need a way to compensate key employees who are focused on how the benefit package impacts the overall quality of the workplace. Nonqualified plans can have a favorable impact on the workplace by singling out these key employees for added benefits.
What is a Nonqualified Plan?
Nonqualified plans were originally conceived to counteract the limits place on contributions and benefits to traditional tax qualified retirement plans. Today, they are an ideal supplement to these plans. Why? Because they bridge the gap between thee benefits available under these tax-qualified retirement plans and the amount needed by your key management and highly compensated employees for a financially secure retirement.
How a Nonqualified Plan Works
 This graphic demonstrates the interaction that is needed between the business and an employee participant when implementing a nonqualified plan.
The business owner selects the employee who will participate in the plan and they enter into an agreement detailing the plan. Depending on the type of plan, either compensation or bonus monies are deferred to provide future retirement funds, and survivor benefits in the event of a premature death. Any employer contributions from your business are optional.
Kinds of Plans
There are several types of nonqualified plans and you can choose the plan which best accomplishes your company’s goals and objectives.
A traditional deferred compensation plan permits your key executive to defer compensation until a future retirement date. These are ideal basic plans that provide the executive with deferred taxation on income. Normally, the employer declares a fixed crediting rate to the deferral account balance.
A supplemental executive retirement plan or SERP is a good choice when the company is willing to make contributions to the plan. SERPs can be structured as a defined benefit or defined contribution plan. In both cases, the plans are informally funded entirely with company money. Employee deferrals are not allowed.
A 401(k) mirror or look-a-like plan looks just like its tax-qualified counterpart, but without the rules regulations and testing. You and your key executive both can contribute to the future retirement benefit. 401(k) Mirror Plans are a good choice for employers who want to provide a plan that gives employees the ability to defer part of their current income.
Pension Income Alternative - How can you get the most out of your pension?
Your Pension Dilemma
At retirement, you have a decision to make:
- Take my full pension, or
- Take a reduced benefit in order to provide a spousal income if I die first.
The wrong decision could eliminate pension income and/or benefits for the spouse and cost the retiree and spouse thousands. Despite the reduced income, most people choose a Joint and Survivor option to maintain financial security for their spouse.
The Least Flexible, Possibly Most Expensive Program Available
What would happen if your spouse died first?
…You may be locked into a joint and survivor benefit’s lower income.
What would happen if you both lived a long life?
…You will have taken a reduced income for many years.
What if both you and your spouse die within the same timeframe?
…Your entire pension benefit will discontinue.
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