By Bill Barks, CPA
Director of Employee Benefit Plan Services
Why do we offer Employee Benefit Plans (EBP) to our workers? It’s a seemingly simple question with a multifaceted answer.
As an employer, your biggest challenge is in how to design and implement an employee benefits plan that balances your desire to provide for your employees with the resources and missions of the organization. Here are some of the key pitfalls and benefits of EBPs.
Pitfalls
One of the biggest problems is an improper plan design that doesn’t fit the demographics, geographic location and other specifics of your workforce. For instance, if yours is an industry where people tend to retire at an earlier age, such as police and firefighters, then that should be reflected in terms of retirement matching, health coverage, etc.
Another common pitfall is not having an Investment Advisor on the plan. As the sponsor of the plan, the employer assumes a Fiduciary role. Consider engaging an Investment Advisor to assist with your fiduciary obligations and who can offer an independent perspective.
It’s also easy to misunderstand timing requirements of EBPs. For instance, many smaller companies may start out with a SIMPLE Plan, and then want to change to a traditional 401k as the operation grows. But federal rules prohibit having both in place in the same year.
Don’t have amateurs involved with your plan. Hire experienced consultants with expertise in investment options, plan design and compliance. It’s best not to comingle all functions.
As silly as it sounds, don’t set up a plan and then forget about it. Many companies fail to reevaluate their benefits package every three or four years to see if it’s still meeting objectives as the size and mission of the organization evolve.
A final pitfall is committing plan errors, such as making late deposits of employee withholdings, which can result in a heavy censure and fine from the IRS. Errors also can happen when companies fail to follow their plan documents, such as failing to understand who is eligible to participate and how compensation is defined.
Benefits
At its most basic, the reason companies give employees benefits is to provide for workers, so their lives will be happier and more stable, and thus they are more likely to be loyal and productive members of the team. There are also considerable tax savings, both for the employer and employee, to having benefit plans in place.
In terms of employee recruitment and retention, EBPs are a prime way to attract and keep the best workers – especially in a tightening labor market where there is more competition for prime employees. No one wants to lose a top candidate because the firm across the street has a more attractive benefits package.
There is also an advantage in having your team members be “retirement ready.” This means that they have properly saved and planned so they are ready and able to head out the door to a well-earned retirement when they desire to. Far too many people reach the age they want to retire and find they don’t have the funds to do so.
There are myriad tax benefits for having an EBP in place, including deductions for the cost of the plan and employer contributions. Employees receive tax deferrals by saving money on a pretax basis. Tax credits even exist to help employers set up a new plan, as well as for low-income workers.
Finally, benefit plans are a useful tool for succession planning. This is especially true in family-owned or closely-held companies, where the first generation of owners may have the majority of their wealth tied up in the firm, and find they don’t have enough liquid resources to step out of the business.
Employees are more savvy than ever, and know that their total compensation goes beyond wages to include health insurance, a retirement savings vehicle and other factors. Your benefits package is more important than ever in making your organization an “employer of choice.”
Sponsel CPA Group provides plan design and compliance services. If you have questions about your company’s employee benefit plan, please contact Bill Barks at (317) 613-7867 or email [email protected].