Reaping the Benefits of an Employee Retirement Plan

Your manufacturing company doesn't offer a retirement savings plan for your employees? Join the club. About half of working Americans don't have a retirement plan at work, according to the IRS.

The IRS is working to change that statistic with several recent initiatives to encourage participation among employers and employees. For manufacturers, establishing a retirement plan makes your company more attractive to potential hires and translates into tax benefits. If you don't have a plan in place, here how to get started.

Two categories of plans

Retirement plans generally fall into one of two categories: defined-benefit plans, where employees receive a fixed amount when they retire, and defined-contribution plans, where employees contribute a fixed amount to an account during their careers. Defined-contribution plans are more common these days in the private sector, and the 401(k) plan is the most popular among them. When implementing a 401(k) plan, you can choose whether to match your employees' contributions.

Choosing an automatic enrollment 401(k) plan can increase employee participation further. And the IRS no longer requires employers to apply for approval before instituting automatic enrollment. Under these plans, employees automatically have a portion of their paychecks deposited into a retirement account, and can opt out of the plan at any time.

Another recent IRS initiative allows companies to automatically increase the amount of an employee paycheck that is diverted to a savings plan each year. Employees may stop the increases at any time.

As for defined-benefit plans, you can offer pension plans, which pay employees a fixed amount periodically after they retire, or a new alternative, the cash balance plan, which sets an employee retirement account at a particular level, such as $100,000, when the employee retires. The amount of benefits in an employee cash balance plan is specified in the plan terms and typically is based on the employee salary and a fixed or variable interest level. On retirement, the employee can take the account balance in a lump sum or as monthly payments.

Whatever plan you choose, your contributions and your employees' contributions are tax-deductible. Qualified manufacturers also can claim tax credits of up to $500 a year for the plan first three years to cover start-up and maintenance costs.

Maintain your plan

After your plan is in place, monitor it to ensure it retains its preferential tax status and to avoid errors. You'll need to file paperwork with the IRS each year showing that your plan doesn't favor certain workers over others, that plan costs are reasonable and that plans operate in participants' best interests. If your plan loses a large number of participants because of employee turnover or layoffs, you may incur a partial plan termination and lose your plan tax-favored status. Make sure you know the effect on your plan before instituting major personnel changes.

If you discover errors in your plan, the IRS offers several options for correcting them. Depending on the severity of the error, you may pay a fee, but resolving the issue will help you avoid having your plan terminated.

Many options

You want to retain your best employees and attract highly qualified new candidates. Offering an employee retirement plan can help. There are many different plan types to choose from, so discuss with your financial advisor which makes the most sense for your company.