Posted by Abundant Wealth Planning LLC

The Benefits of Defined Pension Plan to Small Business

The Benefits of Defined Pension Plan to Small Business


As a small business owner, it might be a smart move creating pension plans for your employees. In this article, you will know the benefits it will give to both you and your employer. 


Small business pension plans, what are they?


The employer contributes to employees’ retirement funds as a retirement pension plan. Usually, at retirement, you will expect a specific amount of benefit. 


A more traditional pension, in which a defined amount of monthly income after retirement is guaranteed to the employee which usually depends or based on the income earned and years of service are called Defined Benefit Plans. 


Employers can also match a percentage of what the employees put into a fund that is invested and the employees’ retirement will have the returns on those investments, this is possible in another type of retirement plan which is called a Defined Contribution Plan.


Having a pension plan can benefit both you and your employees


Having a retirement to look forward to once they’re done working is the clearest benefit employees can see in a small business pension plan. But as an employer, are you aware of the benefits this might give too?


A high chance to recruit good workers. Benefits like a small business pension plan will be a big help in attracting the top talent to your small business. Everyone should have a pension plan as to what 9 out of 10 Americans believe according to the AARP report. The luxury to wait for the right job that offers this kind of benefit is possible for a skilled worker with a desirable skill set. 


Not changing employees too often. It is neither productive nor cost-effective for a small business in losing employees and re-hiring ones. Employees might be more likely to stick with your small business if you offer them what they need to be well covered. 


Your employees will be motivated. Your employees might have a reason to stay motivated when you cultivate a feeling of support with a small business pension plan. Your employees might be more encouraged to perform well and earn more throughout their careers since some pension plans may be based on the employee’s salary while working. 


Tax benefits, one thing you should consider why you should have a small business pension plan


For establishing a qualified retirement plan to offer to your employees, you may be eligible for a tax credit. The cost of creating pension plans for employees might be lessened through this. 


By offering a small business pension plan, you will have your options for saving on taxes and you can talk those to your accountant or a tax specialist. 


The difference between qualified and non-qualified pension plans


When creating a pension plan, you will have a variety of different types of small business plans to choose from such as “defined contribution plan” and “defined benefit plan”. But the difference is if the plan is a qualified one or an unqualified one.  


You will have the option to take a tax deduction when you are still contributing to the plan in a qualified plan such as 401k. Employees will be taxed on the money that comes from it when they retire and start using their pension plans. 


Funds that are made-up of tax money is what non-qualified plans are. An example of a non-qualified plan is a Certificate of Deposit (CD). The funds are not going to be taxed again when the small business pension plan will be withdrawn by the employees upon retirement. 


Advantages and Disadvantages of a small business pension plan


Advantages: Employees will have financial support when they retire and they don’t have to worry, much. Because of this, positive work experience will be felt and there is also a higher chance of attracting skilled and qualified employees. 


Disadvantages: Depending on what type of plan, having a lot of responsibility for funding for the retirement of employees could be a requirement for pension plans. But if you can’t afford to provide a Defined Benefit Pension, just so that your employees aren’t left completely without any retirement savings, there are also other options out there such as Defined Contribution Plans. 


The whole decision is entirely up to you in the end. You might find the benefits good for you, your business, and also for your employees. You can always consult a legal adviser or a tax specialist for legal advice.



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