Choosing a Plan: Overview of Employer-Sponsored Retirement Plans

written by Aaron Henry

This is the fifth article in our Retirement series. This article will be split into two parts. Check in next week for part 2.

Are you a business owner? Do you have an employer-sponsored retirement plan? Did you know that experts have estimated that 70 to 90 percent of pre-retirement income will be necessary for Americans to maintain their current standard of living when they retire? This statistic alone confirms that employers serve an important role in providing access to responsible retirement savings options. In addition, there are major benefits for the company. Offering an attractive benefits package is a major selling point for employers who want to attract and retain top-notch employees. In addition, retirement plans offer substantial tax benefits for employers and employees.

So what are your options? This article will provide an overview of popular employer-sponsored retirement plans to help you make the best decision for your business.

401(k) Plans
401(k) plans are by far the most popular option for an employer-sponsored retirement plan. The following are reasons employers choose a 401(k) plan for their business:

  • Participants can decide how much to defer from their wages, subject to limitations.
  • Deferrals can grow through investments in stocks, bonds, mutual funds, etc.
  • Generally, contributions and earnings are nontaxable until distributed.
  • Employers receive tax benefits for contributing to their employee’s accounts.
  • Participants can usually take their benefits with them if they discontinue service.
  • The plan can be beneficial for employees of all ranks, from staff to owners.
  • It is a great plan if cash flow is an issue.
  • Participant loans and hardship withdrawals are optional and provide flexibility for participants.
  • There are several different types of 401(k) plans out there, including traditional, automatic, safe harbor, and SIMPLE 401(k).

Employee Stock Ownership Plans (ESOPs)
An ESOP is a type of qualified defined contribution plan in which employees have partial ownership of your business. This type of plan is becoming increasing popular for the reasons below:

  • The plan can motivate and empower employees by giving them part ownership.
  • It is a quick way to raise capital.
  • The business owner can sell all ownership or transition it over time.
  • Employee contributions are allowable in KSOP or ESOP w/ a 401(k) option; these contributions are nontaxable until distributed.
  • Employer cash and stock contributions to the ESOP are tax-deductible, subject to limitations.
  • The ESOP is unique in its ability to borrow cash to buy shares; contributions used to repay this loan are tax-deductible.

If you have any questions about 401(k) plans or ESOPs, please contact us today 417-881-0145.


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