By looking at growth and staffing, you may take the guess work out of determining if you could run into trouble in a SIMPLE plan. Your business goals may also highlight issues like diversity and inclusion or environmental stewardship which could make some MEP plans incompatible with your company culture.
When it comes to enrolling their employees in retirement accounts, small businesses may have a few things to consider that their larger colleagues don’t face. The most prominent among them is staffing shortage. Many larger companies have the resources to have a dedicated, in-house administrative person to help with onboarding, claims and other administrivia. Small businesses, especially those experiencing high growth or in a dynamic market where staffing may shift quickly, may need to dedicate their resources to different areas. Small businesses may need to consider outsourcing their administration. That could result in hiring multiple vendors for their retirement accounts. That also may require ensuring that their payroll vendor and third-party administrator all have systems that work harmoniously, a tall order in today’s tech world. Additional vendors may mean additional costs.
Some small businesses may choose to opt for a pooled employer (sometimes called a Multiple Employer or MEP plan). Those MEP plans also have special concerns. A MEP Plan is one where multiple unrelated employers come together to offer a plan to their employees. The plan is sponsored by an entity that provides the administrative services and usually acts as a fiduciary for the plan. But, because the employers come together, they must all qualify for the MEP status. That means if one employer fails to qualify, all the employers could have potential problems. The IRS is publishing new rules that may help this “One Bad Apple Rule.” Confusingly, the rules fall to the IRS not the Department of Labor on these employment-related rules. Some MEPs also limit investment choices, an option that employees may find frustrating. This could be especially true for employees who are concerned within investing in companies based on social reasons, like diversity and inclusion or environmental performance. MEPs may seem like a preferable option but may be harder in practice.
Other concerns small businesses may have involve choosing the right plan. But it can be hard to distinguish which plan is right for them. For example, small businesses can opt for a SIMPLE plan where larger companies cannot. But a SIMPLE plan may not be the best plan for growing companies. For businesses with 100 or fewer employees, a SIMPLE plan may be an option that works well for them. SIMPLE plans also have benefits. This includes being exempt from nondiscrimination testing (annual tests to ensure that plans benefit all the employees, not just owners or executive staff). SIMPLE plans have some limits, including that employees are age 21 or over, and that they don’t have more than 100 employees who have received more than $5000 in compensation. This last requirement could be tricky if a business hires summer workers. With starting salaries for workers now above $13/hour in some locations, a three-month full-time worker could earn more than $5000, thus making the entire company ineligible for the SIMPLE plan. And there are drawbacks. This includes tight regulations with the dates for starting them. And businesses which may have dynamic earnings cannot change contributions once the amount has been set. That means companies that want to increase contributions midway through the year to match a competing job offer or to attract more applicants cannot change their preset amounts. SIMPLE plans may not be so simple for small but growing businesses.
How can small businesses choose the right plan that factors administrative costs but also addresses their need for flexibility? It may be best to keep it to the basics. Some analysts and experts suggest that you start with your business goals and values, instead of jumping into choosing a plan. Your business goals will help you determine growth and staffing. By looking at growth and staffing, you may take the guess work out of determining if you could run into trouble in a SIMPLE plan. Your business goals may also highlight issues like diversity and inclusion or environmental stewardship which could make some MEP plans incompatible with your company culture. Goals and values may also drive who you choose to partner with as vendors. This can help you choose who and how to hire vendors and third parties, which can also help you choose the right plan.
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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