By Matt Lewis, President, Western Growers Financial Services
There has been a lot of hype around the recent change in administrator and custodian for the Western Growers Retirement Security Plan (RSP), and for good reason. With Northwest Plan Services (NWPS) as our new Third Party Administrator and Charles Schwab as the new custodian of our assets, RSP now offers alternative retirement vehicles to help agricultural employers overcome the challenges associated with traditional 401(k) plans.
When it comes to competing for top talent, agricultural employers are no different than other businesses. Robust compensation packages, complete with a solid retirement plan, are crucial to attracting and retaining key members of your management team. However, because of restrictions by the IRS, typical 401(k), profit-sharing and other qualified plans often do not meet the savings and tax planning needs of highly compensated employees.
As I discussed in my last column, qualified plans are funded through tax-deferred contributions from the employee, and all employees who meet the eligibility requirements must be permitted to participate. Importantly, the benefits must be proportionately equal for all employees, with penalties and returns of participant contributions if a company fails Employee Retirement Income Security Act (ERISA) rules of discrimination.
This can pose unique problems for agricultural employers. The agricultural workforce is largely seasonal, and many employees may not elect or even want to participate in employer-sponsored 401(k) plans, which can hurt those participants who are saving in their retirement accounts.
Backed by NWPS and Charles Schwab, RSP employers now have the option of providing their employees with several powerful retirement tools in addition to, or in lieu of, traditional 401(k) plans.
Nonqualified Deferred Compensation Plans
Governed by Section 409(a) of the Internal Revenue Code, a nonqualified deferred compensation plan allows employees to defer a greater percentage of their compensation than is allowed by the IRS in 401(k) or other qualified plans.
There are several important differences between qualified and nonqualified plans. While qualified plans use pre-tax dollars, the employee will pay taxes on their income before contributing to a nonqualified plan. However, there are no deferral limits for nonqualified plans, while employee 401(k) contributions top off at $19,500 in 2021 ($26,000 for those 50 and older).
From an employer perspective, contributions to a qualified plan may be deducted, but contributions to a nonqualified plan generally cannot be written off. However, while qualified plans must be offered to all employees, nonqualified plans can be made available to select individuals; often called carve-out plans, making it an appealing option for companies looking to provide expanded retirement savings for certain employees.
Practically speaking, nonqualified plans look very similar to 401(k)-type plans, with many of the same investment options and similar fees and expenses, making it an important employee benefit that may help you recruit and retain top talent.
Cross-Tested Profit-Sharing Plans
Cross-testing allows a company to define separate classes of employees and allocate profit sharing contributions on a different percentage basis to each class. This plan allows businesses to contribute a higher rate to the owner and other highly compensated employees while also providing a significant benefit to the rest of the employees.
Like other qualified plans, the contribution formula must pass the average benefits test, which states that the average benefit provided to the non-highly compensated employees is at least 70% of the average benefit provided to highly compensated employees.
Additionally, non-highly compensated employees must receive an allocation percentage of at least 5% of their compensation or one-third of the allocation rate of the highly compensated employee with the highest allocation rate. This is called a minimum allocation gateway.
In one scenario, the owner could receive 9% of compensation while the other eligible employees would receive 3%, which passes the one-third minimum allocation gateway. In another scenario, highly compensated employees could receive a higher allocation rate, typically 14% to 25% of compensation, while the non-highly compensated employees would receive 5%, which passes the 5% minimum allocation gateway.
Consider Participating in RSP
If your company has never considered offering a retirement plan because of the eligibility requirements associated with typical 401(k) plans or would like to provide additional savings options to a small group of top individuals, RSP employers now have access to more flexible investment vehicles.
To learn more about RSP’s expanded capabilities to better serve the retirement needs of our members and their employees, please contact me at [email protected].