What You Need to Know About Employer Sponsored Retirement Plans

Employer sponsored retirement plans are good for workers and good for employers. And while the current economic environment may put pressure on everyone’s ability to participate fully right now, the fact remains that there’s no time like the present for employers that haven’t set plans up to do so.

An employer sponsored retirement plan is one that helps employees put money aside for retirement, with tax-advantaged savings taken directly from paychecks and invested. If employers decide to match the contributions, they can get tax breaks for doing so. Employer sponsored retirement plans are also considered must-haves to be competitive on the recruitment front.

Small U.S. businesses have historically been less likely to offer employer sponsored retirement plans to their workers than larger concerns. As the U.S. Small Business Administration has found, nearly 72% of workers in small companies have no plan available through their employer. Only 19.5% of those who work in small private firms participate in their retirement plans . It underscores the issue that Americans are not prepared for retirement: 17% of 45- to 59-year-olds and 13% of the 60-plus cohort have no retirement savings.

This was one of the driving forces behind the SECURE Act (Setting Every Community Up for Retirement Enhancement) that was signed into law late in 2019. The most significant set of changes to our retirement system since 2006, the SECURE Act improves incentives for everyone, making the establishment an employer sponsored retirement plan more possible than ever before.

Here are key points to keep in mind about employer sponsored retirement plans, especially within the context of SECURE Act measures:

• First, employers must understand their plan options. There are various types of employer sponsored retirement plans. The traditional defined benefit pension plan is a relic of the past. Among the better known are:
  • The 401(k) plan, the most common employer sponsored retirement plan, typically offered by bigger concerns. The 401(k) is a defined contribution plan; the employee contributes tax-deductible funds which can be matched at some level by the employer. The employee can choose where to invest the funds, although employers may specify a default fund. Counterparts to the 401(k) are the 403(b) plans for non-profits, such as public school systems and churches, and the 457 plan for state and local government employees.
  • The Savings Incentive Match Plan for Employees (SIMPLE) is an Individual Retirement Account offered by smaller employers who don’t offer more complex retirement plans. The employee makes tax deductible contributions and the employer can match or make nonelective contributions. The maximum contribution is limited to $13,500 in 2020 (or $16,500 for employees 50 or older).
  • The Simplified Employee Pension Plan (SEP) is also based on an IRA with the same requirements for investments, distribution and rollovers, but more generous contribution limits for many employees.
• Look into improved tax credits. This is one way the SECURE Act aims to encourage small employers to put retirement plans in place. Generally speaking, those with 100 or fewer workers can take a retirement plan startup cost tax credit of up to $5,000. There’s also a three-year, $500 per year tax credit for employers that add auto enrollment to their retirement plans.
• A way to reward long-time part-timers. One of the structural drawbacks of the current retirement system is the lack of access to retirement benefits by long-time part-timers. A Congressional Report last year noted that only 40% of part-time civilian workers had access to a retirement plan. Under the SECURE Act, offering access will be mandatory as of Jan. 1, 2021 – with certain provisos. That’s probably going to be a good thing, as the U.S. has generally experienced sustained stretches of full employment that make any recruiting advantage, including for part-timers, important to grab.

Employer sponsored retirement plans are an important way to for businesses to help themselves and their employees prepare for the future. The way forward starts by learning the landscape and the significance of the SECURE Act.

HUB International’s team of retirement plan specialists provide ongoing guidance on your plan’s setup and management to ensure it meets regulatory compliance guidelines and the interests of your employees.

Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only, and is not intended to constitute legal or tax advice as to an organization’s specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your organization’s particular needs.

HUB Retirement and Private Wealth employees are Registered Representatives of and offer Securities and Advisory services through various Broker Dealers and Registered Investment Advisers, which may or may not be affiliated with HUB International. Insurance services are offered through HUB International, an affiliate.