When running a business, planning for your employee contributions can make your business competitive in the workforce market and retain employees. Not many companies do that. Whether through your business or a joint venture between you and the employees, handling your employee contributions will significantly boost their wellbeing. There are three ways companies can make their employees contribute to their benefits. These include a Simplified Employee Pension (SEP), payroll deduction IRA, and a Simple IRA. Here is how you can handle the three to your employees.
1. Simple IRAs
A simple IRA is a deduction by companies to their employee contribution, done via salary deduction, and the company contributes part of it. The employee deduction and the company’s contribution are then sent to the employee SIMPLE IRA. It works just like the traditional IRA, where taxes only apply during distribution and not a contribution. SIMPLE IRAs are governed by special conditions, including contribution limits and deadlines.
Some of the deadlines include submitting the amount to the IRA seven days after deducting it from payroll. In contribution, the limits include the company having less than a hundred employees who earned $5,000 and above in the previous year. The employer should also not make any other employer retirement plan besides this.
To set up a simple IRA, the company must first adopt the plan by signing the required forms. Next, it has to induct the employees about the plan, the contributions, and its benefits. Finally, each employee will set their own SIMPLE IRA account, which can be done at the bank or with an insurance company.
2. Payroll Deduction IRAs
Most companies use this method for employees who want to save for their future, but they do not know how to contribute or don’t like to contribute to the benefits. In case a business decides to go this way for its employees, it should avail the plan to all types of employees who would want to use this system to contribute to their future. The employees have to decide the amount that should be deducted from their payslip to the IRA. There are two types of contributions companies can choose to make:
● Traditional IRAs
In traditional IRAs, deductions have to be made before deducting the taxes. The amount sent to the IRA must not be taxed. These distributions need to be taken after 59½ years and have no penalties. In case they are withdrawn before, they are subjected to a 10% early withdrawal penalty. The employee has to consider all conditions before deciding to go this way since future withdrawal taxes might be higher.
● Roth IRAs
In this plan, the contribution is taxed before being remitted to the IRA. This taxing before remitting has its advantages because the employee will withdraw their benefits tax-free. There are also no taxes paid on capital gains and dividends on the investments. Most people prefer this kind of investment when there is a possibility of high taxes during withdrawals. It makes this kind of contribution to be preferred to many as compared to the traditional contribution.
Before deducting these contributions, you need to inform your employees of its benefits and that the contributions are purely their deductions and nothing more. The company will establish a payroll deduction program either through insurance, bank, or mutual fund to make this process effective. An employee can choose whether to opt for the traditional IRA or the Roth IRA.
3. SEP IRAs
SEP IRA is a plan set for business owners to make their contributions and those of their employees. This contribution method is only applicable to companies and has a higher annual limit compared to others. The company gets a tax deduction for contributions made, while the employees don’t get affected by the cut. During distribution, the income tax rate applies to withdrawals.
To establish this process, the company has to set an IRA for every employee and contribute directly to each account. The company can adjust its contribution depending on the highs and lows of the business. In this contribution, the company size and number of employees don’t matter. They only need to fill out the required forms and follow instructions to the latter. The costs for carrying this process are minimal, and all contributions go to the employee. The company offering this SEP IRA is not allowed to provide any other retirement plan.
Companies can use these contributions to retain their employees and make their company’s top the rest in the job market and employee retention. With these benefits, most employees will stick with the company and might work harder to see it grow to continue enjoying the advantages. You can use this information to implement the right contribution plan for your employees.