The Employee Retirement Income Security Act (ERISA) protects employees by setting out minimum standards that retirement and health care plans must meet. Since the law’s inception in 1974, these requirements have evolved, but its core principles remain:
- Responsibility of fiduciaries in managing plan funds.
- Disclosure of information about the plan and its investments.
- Right to participate by all employees who meet eligibility requirements.
- Right to vesting of employer-provided assets over time.
- Nondiscrimination in coverage between high-paid and lower-paid employees.
- Protection of plan funds from creditors, bankruptcy proceedings, and civil lawsuits.
Plans that meet ERISA’s standards are referred to as “qualified plans.” Qualified plans include 401(k)s, defined-benefit plans, and profit-sharing plans.
These standards obviously make qualified plans attractive to employees, but they are attractive to employers as well. Qualified plans have tax-deferred contributions from the employee, and employers can deduct amounts they contribute to the plan. As employers offer more generous matching policies to more employees, they can attract talent to their team while lowing their tax burden.
Despite these benefits, however, qualified plans are not feasible for every employer. ERISA rules are complicated, and setting up qualified retirement plans can be prohibitively expensive.
Employers may also consider nonqualified plans that do not meet ERISA standards. From a tax perspective, however, nonqualified plans miss out on savings because they are funded with after-tax dollars and are not deductible to the employer.
There are alternatives that allow small businesses to avoid the black and white divide between qualified and nonqualified plans. For example, companies with 100 or fewer employees can set up SIMPLE IRAs. A SIMPLE IRA is covered by ERISA but doesn’t bear the same reporting and administrative burden as qualified plans like 401(k)s. At the same time, this plan offers tax savings because contributions by the employee are tax-deferred and contributions by the employer are tax-deductible.
Many more retirement plans are available than those that can fit in one blog post. When deciding what retirement options are right for your small business, talking with a trusted advisor is an important step. They can help you weigh the advantages and costs of the plans that are available. They can help you navigate how plans to grow your workforce beyond yourself and your family will influence your retirement offerings. If you would like K&R to plan alongside you, call our office at 480-392-6801 to schedule a consultation.
