Tying Benefit Plan to Company Goals
Posted 9-8-2010 | By Cathy O’Brien | Download Article
As seen in Minnesota Business Experts' Forum:
Does your benefit plan tie to your business goals?
There is a strategic link to aligning a professional service company benefit plan to business goals. Whether new, established, or comprised of highly compensated participants, a professional service company’s benefit plan should be designed to allow deferred benefits to shareholders, encourage participation, and provide an incentive to attract and retain talent.
Since a professional service company’s number one asset is their employees, attracting and retaining talent is essential to the business plan. The combination of a competitive salary and comprehensive benefit package is often a significant factor for attracting and retaining talent.
New and small professional service firms with very little working capital are more aligned to benefit plans that have no annual reporting requirements, such as Savings Incentive Match Plans for Employees (SIMPLE) IRA, or a Simplified Employer Pension Plan (SEP) IRA.
Established firms are more aligned with defined contribution plans such as a traditional 401(k), Profit Sharing, or Safe Harbor 401(k) plans. These plans are complex, can be expensive to administer, and have restrictions placed on highly compensated individuals. However, the elective deferral limits in a 401(k) are greater than a SIMPLE IRA and the elective deferrals through payroll withholding make it easier for employees to save for retirement.
Firms comprised of older, closer-to-retirement, highly-compensated individuals will be more aligned to a defined benefit plan. These plans are the most costly to design, adopt and administer, however they allow large contributions. Contributions are calculated based on actuarial tables and are designed to provide a guaranteed monthly benefit for the life of a participant.
A company’s business plan may evolve as the business matures, causing some firms to outgrow their current benefit plan. It is important to evaluate your benefit plan every year related to the design as well as investments. Approach your plan evaluation using three E’s : Enhance, Expand, or Exit. Examples are, enhance your plan by transitioning from a SIMPLE Plan or SEP to a defined contribution plan. Expand the existing plan for more flexibility such as including or utilizing the discretionary profit sharing contribution feature. Evaluate whether to exit a plan if the plan has become too expensive to maintain or is not serving the needs of the participants.
For more information, please contact Cathy O’Brien, MBA, CPA, at cobrien@hlbtr.com or 651-407-5847.