impact the assets available for retirement. Examples of defined contribution plans include 401(k), 403(b), SEPs, and profit sharing plans, among others. Let’s look at these individually and explore the benefits and limitations of each. The most recognizable type of a defined contribution plan is a 401(k), which derives its name from the section of the U.S. tax code that allows for the contributions to take place. While the 401(k) allows for flexibility in plan design, with it comes additional regulations and larger setup and maintenance costs. The 401(k) allows participants to invest a portion of their wages prior to taxes being deducted (pre-tax). In other words, the contributions made by employees reduce their taxable income for the year in which the contributions are made. The 401(k) allows employees to determine the size of contributions (within limits) and most plans provide a variety of investment options (typically mutual funds). Additionally, an employer can offer a matching benefit, in which
the employer matches some portion of the contributions, thus growing the account more quickly. When an employer implements a match, those matching dollars are tax-deductible, lowering the corporate tax bill in addition to providing an attractive benefit to the staff. When looking at tools to retain a productive workforce, the match should not be overlooked. Another helpful tool in the battle for productive workers is the vesting schedule. The term “vested” is used to determine how much of the funds an employee can take with them should they leave the company. All employee contributions are immediately 100% vested, but employer contributions are vested according to company policy, which can encourage employee longevity. In a 401(k), the maximum vesting schedule allowed is six years, after which all contributions are 100% vested. A 401(k) should be considered by distillers who are looking to recruit and retain employees with a tailored retirement plan.
A Simplified Employee Pension Plan (SEP) is an attractive alternative to high-cost, high-maintenance plans and is a favorite among small business owners. It allows employers to contribute on a tax-favored basis to individual retirement accounts (IRAs), which are owned by the employees. The reason SEPs are often utilized is the minimal reporting and disclosure requirements, which make them easily accessible to businesses with limited resources. Unlike a 401(k), the employer makes all contributions to the plan based on a percentage of compensation. Those contributions are immediately 100% vested. The employer may contribute up to 25% of compensation or $55,000 per year, whichever is less, and must contribute the same percentage across all employees. As business evolves, so too can the contributions, which can vary from year to year as needed. The SEP is often chosen by employers starting their first retirement plan and is an option to consider for small distilleries looking to
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