In addition to dealing with a shortage of skilled hourly workers, many construction businesses are also struggling to attract and retain experienced executives, managers, and team leaders. Well-designed retirement or profit-sharing plans can be helpful in this effort.
They also can reduce a company’s tax liability and help company owners accumulate wealth for their own retirement. Qualified plans—that is, those that meet Internal Revenue Code and Employee Retirement Income Security Act of 1974 (ERISA) requirements—let the company deduct contributions it makes, while earnings on employees’ retirement accounts are tax deferred.
If your company is thinking of upgrading its benefits package to appeal to high-performing leaders, here are some of the qualified alternatives you could consider:
• SIMPLE IRA – SIMPLE stands for Savings Incentive Match Plan for Employees. As with a conventional IRA, employees make tax-deductible contributions, but in a SIMPLE IRA the employer can make a matching, tax-deductible contribution (up to 3% of the employee’s salary). Employees’ annual contributions are limited to $13,000 ($16,000 for employees age 50 and over). Many companies find these limits diminish a SIMPLE plan’s effectiveness as a recruiting tool or as a retirement vehicle for company owners.
• SEP IRA – A SEP (or Simplified Employee Pension) IRA has much higher contribution limits than a SIMPLE IRA—up to 25% of the employee’s annual compensation or $56,000 per year, whichever is less. But a SEP is funded solely by the employer—there are no employee contributions—and the contributions must be uniform for all plan participants. For these reasons, SEPs appeal primarily to self-employed contractors with very few employees.
• 401(k) – A 401(k) plan lets employees defer a portion of their pre-tax salary and invest it into one of several tax-deferred investment packages that the financial advisor who administers the plan offers. The employer can choose to match 25%, 50%, or even 100% of the employee’s contribution, but is not required to do so. One variation, a Roth 401(k), lets employees make their contributions on an after-tax basis, but employer contributions are still tax-deductible.
Employee contributions are limited to $19,000 annually ($25,000 for those over age 50). Moreover, traditional 401(k) plans must pass several nondiscrimination tests to make sure they do not unduly benefit highly compensated employees (HCEs).
These tests can limit owners’ and other HCEs’ contributions even further, reducing their appeal as an executive incentive.
• Safe Harbor 401(k) – Safe Harbor 401(k) plans are not subject to some of the traditional 401(k) nondiscrimination tests, so business owners and other HCEs might be able to contribute larger amounts than a traditional plan would allow. Nevertheless, their contributions are still limited to $19,000 or $25,000. In addition, Safe Harbor plans also impose minimum matching contribution requirements on employers.
• Profit Sharing – Qualified profit-sharing plans let employers make discretionary, tax-deductible contributions equal to as much as 25% of their eligible employees’ salaries. The contributions can be allocated proportionally based on salaries or can be weighted to give older participants a larger allocation. Employees themselves do not contribute, and employer contributions are limited to $56,000 per employee ($62,000 for those age 50 or more).
• New Comparability Plans – These profit-sharing plans allow companies to set different contribution levels for various groups of employees (such as owners and HCEs). In this way, employers can fine-tune their plans to meet specific retirement or incentive objectives. Employer contributions are still limited to $56,000 or $62,000 per employee, but these plans also can include a 401(k) feature that lets employees contribute as well.
• Defined Benefit Plans – Unlike defined contribution plans such as IRAs, profit sharing, and 401(k) plans, defined benefit plans guarantee a specific payment upon retirement. This shifts the investment management choices—and the associated risks—to the employer, which is why traditional pension plans are becoming so rare.
One variation, the cash balance plan, combines features of both defined benefit and defined contribution plans. Companies can make much higher contributions to owners and HCEs, and the plan can be combined with a 401(k) plan to produce an even larger benefits package. But it also is more expensive to fund and administer, carries certain risks, and is generally most suitable for highly profitable, closely-held businesses with stable cash flow.
There are many variables to consider when establishing or updating retirement programs. Your company’s size, historic and projected cash flows, and the ownership group’s own long-term goals will affect the final decision.