The increasing median age of the population due to declining fertility rates and increased life expectancy – is nothing new. The resulting demographic change is placing new constraints on employers as employees increasingly demand retirement benefits to support themselves in old age. “Talent,” or employees, is the most important resource a business has, so it is important for businesses to give careful consideration to the compensation and retirement plans they offer. Otherwise, employers may find that they lose, or fail to attract, top talent to businesses offering a better deal.
Two of the most common retirement plans are profit-sharing plans and defined benefit plans.
How do Profit-Sharing Plans Work?
A profit-sharing plan is a retirement plan that accepts discretionary employer contributions.[1] Rather than mandating a set contribution, companies can decide from year to year how much to contribute. If a company has a bad year and fails to realize a profit, it may opt not to contribute to the plan. Employers using a profit-sharing plan must file Form 5500 with the IRS. Benefits of profit-sharing plans include:
- Flexibility: for small businesses and startups that may be strapped for cash, the ability not to make contributions is noteworthy.
- Talent: since employees favor defined benefit plans, defined benefit plans tend to increase the pool of qualified candidates and yield greater employee satisfaction.
Which is the Best Profit-Sharing Option for your Business?
For startups and small businesses with varying cash flows, profit-sharing plans may be the best option to avoid taking on more than the company can chew. For more established businesses with reliable cash flows, defined benefit plans may be better to attract (and keep) the best talent and increase employee satisfaction.
[1] Choosing a Retirement Plan: Profit-Sharing Plan (Mar. 13, 2019, 11:55 a.m.). https://www.irs.gov/retirement-plans/choosing-a-retirement-plan-profit-sharing-plan.
[1] Choosing a Retirement Plan: Defined Benefit Plan (Mar. 13, 2019, 12:15 p.m.). https://www.irs.gov/retirement-plans/defined-benefit-plan
