Is your company-sponsored retirement plan up to par? 3 steps for employers to take before 2021

As we near the end of 2020, it is time for business owners to start thinking about a crucial aspect of year-end planning: a review of their company-sponsored retirement plan. While it is important for owners to review and analyze their retirement plan offerings every year, it is even more so in 2020 due to the passing of the CARES Act as a result of the unprecedented impact from the COVID-19 pandemic.

Depending on a company’s demographics and unique needs, corporate retirement plans sometimes have very different purposes. On one hand, retirement plans can serve to retain and benefit employees and have minimal benefit to business owners.

In other instances, the company-sponsored retirement plan can be beneficial to business owners, by allowing owners to contribute to the plan with pre-tax dollars. If the owner contributed for themselves, in many instances, they would have to give the employees a calculated match or profit-sharing contribution.

If the plan is structured properly, the match or profit-sharing amount would be less than the tax the employer would have paid if there was no retirement plan, and they took a straight distribution. Regardless of its objective, it is important to take the following steps to ensure your company-sponsored retirement plan is up to par in 2021:

1. Analyze the structure and costs of your retirement plans.

As noted above, it is very important for business owners to take the time to review the structure of their retirement plan. Business owners need to ensure that the cost of their plan is appropriate in relation to their goals. Whether it is the cost of benefits to employees or other fees such as administrative costs – the overall expense should be reviewed.

Owners should also consider different corporate retirement plan structures, to ensure they selected the one best suited for themselves and their employees.

For example, they should analyze the differences between a non-elective safe harbor versus a safe harbor match, or a traditional profit-sharing plan versus a new comparability profit sharing plan. These different structures allow owners to save different amounts and shift benefits from owners to employees and vice versa.

Additionally, a defined-benefit plan or cash balance plan allows owners to put far more away pre-tax than defined contribution plans do. Year-end may be a good time for a company of the right size and demographic to consider these types of plans.

2. Review any COVID-19 related amendments.

As companies and employees grappled with the financial impact of the pandemic, the federal government stepped in to help with the passing of the CARES Act. The CARES Act included several provisions for employer-sponsored qualified retirement plans, including waiving required minimum distributions for 2020 and allowing for withdrawals up to $100,000 for coronavirus-related distributions.

Any COVID-19 related changes that a company may have implemented during 2020 should be reviewed to ensure that the regulations and rules under the CARES Act are adhered to.

Owners should also clarify any gray areas that have arisen due to these quickly enacted amendments. These amendments can significantly help employees cope with the devastating economic impact of the pandemic.  It is important to ensure there is transparency across the board with their employees.

3. Provide annual employer education regarding the particular plan in place.

Employers are often the primary fiduciaries of their company’s retirement plan and are subject to strict standards of conduct when acting on behalf of their employee plan participants.

Some of the key responsibilities of a fiduciary include acting in the best interest of the participants, ensuring plan expenses are reasonable and adhering to plan documents.

One of the easiest steps to take to help ensure compliance is to provide employer education on 401(k) plans annually. It is important for companies to have consultants available to speak to their employees about their options and to educate those who have not enrolled.

As 2020 wraps up, it is safe to say we’re all looking forward to brighter horizons in the year ahead. Business owners need to take the time now to review, analyze and update their corporate retirement plans to ensure they are on sound footing heading into 2021.

Robert Conzo, CFP, is CEO & Managing Director of The Wealth Alliance ($1B AUM).