Team Building: Different Retirement Benefits to Offer - The Edge from the National Association of Landscape Professionals

We recently updated our Privacy Policy. By continuing to use this website, you acknowledge that our revised Privacy Policy applies.

Team Building: Different Retirement Benefits to Offer

When you think of retirement plans, a 401(k) is probably the first thing that comes to mind. However, there are a number of other retirement options available for your lawn or landscape business.

No private business in the U.S. is required to offer retirement plans to their employees but this benefit has come to be expected to be competitive in the labor market. Not only can it help draw in more workers but it is the right thing to do for your current team.

“You should know what your goals are before choosing a plan,” Carol Keeling, CFO for NALP. “Are you looking to attract and retain talent by offering a competitive plan, maximize your own retirement savings or offer a vehicle to your employees to save for their retirement, even if you can’t provide funding at this time? Once you define your goals, you can get into the nuts and bolts of each type of plan such as eligibility requirements, employer responsibilities, annual cost and other factors.”

If you are just starting to grow your company beyond yourself, or if you’re wondering if your current retirement benefits are still the best fit for your growing operation, here’s a breakdown of the main types of retirement plans and how they function.

IRA-Based Plans

IRAs are the most basic retirement arrangement and are not just limited to individuals. The main types are Payroll Deduction IRAs, SEP and SIMPLE IRA.

“IRA-based plans are the easiest for an employer to establish and maintain and have no annual filing requirements,” Keeling says. “With a Payroll Deduction IRA, the employee contributes to the plan through a payroll deduction up to the IRS maximum contribution limit and the employer submits the contributions to the plan. A SEP differs in that only the employer makes contributions subject to IRS limits and that the maximum is much higher. With a SIMPLE IRA, both the employer and employee make contributions to the plan. However, the employer must match contributions or contribute 2% of the employee’s compensation.”

Payroll Deduction IRAs provide a simple and direct way for employees to save for their retirement. The employee always makes the decision about whether, when and how much to contribute. Withdrawals are permitted at any time but are subject to federal income taxes and early withdrawals are subject to an additional tax.

SEP is a simplified employee pension plan. Employers generally must contribute a uniform percentage of pay for each employee, although they do not have to make contributions every year. Employers can also decide how much to put into a SEP each year. This plan can be a good fit if your business profits fluctuate from year to year.

A SIMPLE IRA allows employees to contribute a percentage of their salary every paycheck and requires employer contributions. It has a lower cost of setup and administration, but it is limited to companies with 100 or fewer employees.

Defined Contribution Plans

A defined contribution plan does not promise a specific amount at retirement. The employee, employer or both contribute to the individual’s account under the plan. These contributions are invested on the employee’s behalf. The value of the account fluctuates with the value of the investments.

Defined contribution plans include traditional 401(k), Automatic Enrollment 401(k), Safe Harbor 401(k), SIMPLE 401(k) and profit-sharing.

“The 401(k) plans allow for a high level of salary deferrals by employees and contributions may be made by the employer with the exception of the Safe Harbor plan, where they are required,” Keeling says. “In a profit-sharing plan, the employer makes the contributions. The employer will most likely need advice from their financial institution or employee benefit adviser. The employer is required to file an annual Form 5500 with the IRS.”

A traditional 401(k) is the most common retirement offering. Employees can choose to defer a portion of their salary. Employers can choose whether to contribute to all participants, to match employees’ deferrals, to do both or to do neither. Annual nondiscrimination testing is required to ensure that the benefits for rank-and-file employees are proportionate to benefits for owners/managers.

Automatic Enrollment 401(k) plans allow employers to automatically enroll employees and place their salary deductions in certain default investments unless the employee elects otherwise. This is an effective way for employers to increase participation in their 401(k) plans. Some automatic enrollment plans are exempt from nondiscrimination testing.

The Safe Harbor 401(k) plan is meant to encourage employee participation and ease the administrative burden. It is not subject to the annual nondiscrimination tests that apply to the traditional 401(k) plans. However, you are required to contribute to an employee’s 401(k) regardless of their title, compensation or length of service. Employer contributions are fully vested when contributed.

SIMPLE 401(k) is a simplified version of a traditional 401(k) plan and is only for companies with 100 or fewer employees. If you exceed this number of employees, there is a two-year grace period before having to change your 401(k) plan. Nondiscrimination tests are not required for this type of plan. Contributions are nonforfeitable as soon as they are contributed. Employees cannot receive contributions and accruals with any other employer-sponsored retirement plan.

“401(k) plans are a popular employee benefit (and recruiting tool) because employees can put pre-tax compensation towards their retirement,” Keeling says. “Employers can also match the employee contributions. If the employee leaves the job, the 401(k) funds can go with them.”

The maximum annual contribution per participant varies by plan. Check the IRS’s website for the most current limitations.

With profit-sharing plans, the employer may determine, annually, how much will be contributed to the plan (out of profits or otherwise). The plan contains a formula for allocating to each participant a portion of each annual contribution.

Defined Benefit Plan

Defined benefit plans provide a fixed, pre-established benefit for employees and are funded by the employer. Keeling says the trend has been to move away from these plans in most industries, with the exception of financial services and education.

The company takes responsibility for the investment and the distribution to the retired employee. There are risks the returns on the investment will not cover the defined benefit amount that will be due to a retired employee. Defined benefit plans are either paid out in an annuity or a lump-sum payment.

“Under certain circumstances, it is feasible for a landscape company to offer a pension plan,” she says. “For example, it could benefit an owner in his fifties who wants to maximize his retirement contributions in a short period of time. This is not without risk as the annual contribution must be made regardless of how well the company is doing.”

The employer will most likely need advice from their financial institution or employee benefit adviser on whether this retirement plan is a good option.

Jill Odom

Jill Odom is the senior content manager for NALP.