There are many types of retirement plans available. This guide will help you determine if the following qualified retirement plans are a fit for your organization. If you’d like more information, or are interested in a plan design consultation, please contact a BerganKDV Retirement Advisor.
An Employee Stock Ownership Plan (ESOP) establishes employee-ownership in the company they are employed by. They typically create unique tax advantages, increased liquidity for the owners, and often, greater employee satisfaction, motivation and retention. It also allows owners of a business to diversify their holdings (wealth) in a tax-advantaged vehicle.
Candidates for an ESOP should meet the following criteria:
- Be a corporation (either S or C)
- Have a business that is stable and established
- Have a track record of steady profits and cash flows
- Have at least 30 employees and have low turnover
The basic structure of an ESOP is outlined below:
- The company obtains financing and lends the proceeds to the ESOP to buy shares of the business from the owner
- The company makes annual contributions to the ESOP to repay the loan
- As the loan is repaid, the shares are allocated to employees
- When an employee gets close to retiring, they can typically diversify their holdings in the company and prepare for retirement
There is no set design for an ESOP but by partnering with the right team, a custom design that works for your business can be established. ESOPs can typically take six to nine months to set up effectively.
If you think you are an ESOP candidate, don’t hesitate to give us a call!
Qualified plans often fall short for highly-compensated employees who are trying to replace their income upon retirement. Nonqualified deferred compensation (NQDC) plans give highly-compensated employees the tools necessary to overcome these shortfalls. NQDC plans allow employees and their employers to contribute additional tax-deferred compensation to their accounts on a tax deferred basis. These plans can also create a “golden handcuff” for those key employees you are looking to retain.
Who can adopt a NQDC plan:
- Corporations, both publically and privately traded, pass-through entities and nongovernmental tax-exempt businesses with highly-paid employees
- Businesses that are financially sound and have a reasonable expectation of continuing profitable operations in the future
Things to consider:
- Easier and less expensive to implement and maintain than a qualified plan
- Can be offered on a discriminatory basis
- Allows you to control timing and receipt of benefit
- Employee taxation controls the timing of the business deduction
Nonqualified plans are a great fit for employers with non-owner, highly compensated employees and provide almost unlimited design possibilities.
If you think you are NQDC candidate, don’t hesitate to give us a call!
Cash balance plans are a great fit for privately-held small businesses where the owners are looking to save more on a tax-deferred basis than what a traditional profit sharing plan will allow. This plan has the look and feel of a profit sharing plan but is technically a defined benefit plan. This means the plan is able to use defined benefit contribution and benefit limits which are significantly higher.
Most cash balance plans are designed for the primary benefit of the owners. Therefore, the contributions are typically very large with a smaller contribution provided to staff to meet IRS requirements.
Typical demographics of a good cash balance candidate:
- Owners maxing out contributions or in a position financially to do so
- Profitable business with a reasonable belief these profits will continue for the next three plus years
- Prepared to contribute at least 7.5% of employees’ salary to their retirement plans
Things that should be considered with a cash balance plan:
- This plan must be established for indefinite period of time, most professionals advise a minimum of three to five years
- This plan is sensitive to demographic changes; be sure to make your consultants aware of staff turnover
- The sponsor is who bears the investment risk, each plan generally “guarantees” a rate of 3% to 5% return to participants
- Every year the plan is subject to required funding minimums
If you think you a cash balance plan is right for you, don’t hesitate to give us a call!