What are savings plans?

An Employee Savings Plan (ESP) works as a pooled investment account that both the employer and employee can contribute to that offers tax advantages and, in some scenarios, matched contributions. The employee can add a part of their pre-tax earnings to the ESP to fund their retirement savings or other future goals.

While employers are not required to add company funds to the account as well, many businesses do match their employees’ savings contributions up to a certain amount or percentage. A common example of an ESP is the 401(k) retirement plan.

Components of effective employee savings plans

Employee savings plans can be especially attractive to employees because they offer an easy way for them to lower their taxes while also saving money for the long-term. They can also benefit from employer matching funds up to a certain dollar amount when offered. It’s worth noting that ESPs aren’t automatically available in all workplaces, and in some cases, an employee has to be employed for a minimum amount of time before they can start withdrawing employer matching funds.

Employees can determine the amount they’d like taken out of their paychecks that will go into their ESP accounts. Employees also have the option of withdrawing from their accounts, but they may have to wait a certain amount of time before accessing the funds without a penalty. Further, employees may need to be employed for a minimum time period before they can start an ESP and have the ability to withdraw from it.

ESPs are typically retirement plans or health savings plans. The two main types of retirement plans are as follows:

• Defined contribution plans or those offered by corporations: Examples include 401(k) and certain 403(b) retirement plans and individual retirement accounts (IRAs).
• Public or non-profit entity-sponsored plans: These are known as 403(b) or 457(b) plans. Private, non-profit or government employees are typically offered 403(b) plans, qhile state and local government employees are offered 457(b) plans. There are also 457(f) plans, which are offered to employees from non-governmental non-profit organizations.

An employee’s contribution to these retirement plans will lower their taxable income. Additionally, these ESPs have the added benefit of tax deferral until a withdrawal has been made from the account. You should also note that interest may or may not accrue depending on the state in which you reside.

Here are some ideal employee savings plans to consider as a small business owner:

• Simplified Employee Pension Plan, SEP IRA
• Savings Incentive Match Plan for Employees, SIMPLE IRA
• Savings Incentive Match Plan for Employees, SIMPLE 401(k)
• One-participant 401(k) plan
• Defined-benefit pension plan

Related: How to Motivate Your Employees

Tips for how to choose the best employee savings plans

A retirement savings plan has several characteristics and components. It’s important to keep these in mind when selecting the right retirement saving options for your small business. Here are some tips that can help you choose the best ones:

• Determine your business needs: As an employer, you should determine what your company needs. This will ensure that you choose the right plan. For example, you may want a plan with good tax benefits.
• Consider the size of your company: Although your business may be small, any changes in size should be considered when selecting the right plan. For example, if the number of highly paid employees at your business increases, a 401(k) might be a better choice. When you select retirement plans, make sure they’re providing good coverage for your small business employees.
• Make sure you’re not discriminating: When you select a retirement plan for your small business, it’s important to choose the best benefits for all of your employees, not just those that are paid the most. This ensures all employees are treated fairly.
• Consider the contributions and limits: Take into consideration the contribution limitations for each plan. This limits the number of contributions you and your employees can make to a retirement savings account. The entities responsible for making contributions should also be considered. As an employer, you should know whether you’ll need to make contributions.
• Determine the degree of responsibility: Every plan requires a different level of management, so keep that in mind when making decisions. Assessing administrative complexity upfront will help you narrow down the most hassle-free plan for your business.
• Consider the cost: Some plans may require an initial setup or annual maintenance fee, so determine the cost for the plans you’re looking into.
• Keep withdrawal limits in mind: It’s also important to consider when employee withdrawals are allowed.

Best practices for retirement savings plans

Here are a few steps you should take when offering retirement plans for your small business:

• Determine a plan’s fiduciaries: It’s important to know who a plan’s trustees are and what they’re responsible for. Some examples of fiduciaries include executives or retirement plan committee members. Essentially, a fiduciary maintains control over the plan’s assets.
• Educate employees on the plan offerings: Employees should fully understand what options are available to them and what they entail. They should also be made aware of how important it is to save for their long-term financial goals. Employers should encourage employee saving and encourage staff to make wise investment decisions.
• Continuously monitor the plans: ESPs should be evaluated over time. This includes monitoring the expenses and structure of each plan as well as how employees like the plans.
• Offer a variety of plan options: Employees should have a diversified investment portfolio and investment offerings. A greater variety of options will help them invest more wisely.
• Provide assistance to executives: Many plans come with contribution limits. Executives should receive help in regard to qualified plans.

Related: 10 Recruiting Strategies for Hiring Great Employees

Employee savings plan FAQs

Here are some frequently asked questions regarding employee savings plans:

Can an employee roll over their plan if they move to a different company?

If an employee has a defined contribution plan, they can roll their plan over into a similar plan if they switch employers. They can also move their ESP funds into an IRA.

What are some of the benefits of retirement savings plans for employers?

For starters, contributions made by employers are tax-deductible. In addition, assets may be able to grow tax-free, depending on the state the employee lives in. Retirement plans can also attract employees to your company and have the potential to reduce employee turnover.

Are health savings accounts also ESPs?

Yes, they are. A health savings account, or HSA, is a type of ESP that’s also tax-advantaged to help people covered by high-deductible health plans (HDHPs) so they can pay for medical expenses not covered by their existing health plan. The employer and employee can contribute to them up to a certain amount per year.