Employee Benefits Keep It SIMPLE Simpler, less costly employee benefit plans become available  that may be right for you By Lawrence Bivins	Roger Jones (left) and Sandy Beasley wisely invest in Bedford Printing's employee benefit plans.
	Learn more: Maybe you can afford to send workers to college

Like most red-blooded Americans, Sandy Beasley looks forward to retiring one day. Just 38, the manager of Bedford Printing in Raleigh has a few years to go before he’s able to bid farewell to the workforce. “I’d like to retire while I’m still young enough to do things — in my fifties, if possible,” says Beasley.

Beasley’s retirement goals, ambitious though they may be, are closer than those of many employees of small companies because Bedford Printing offers both a 401k savings program and a profit-sharing plan. Those benefits are among the reasons Beasley has remained with the eight-person company since 1988. “It’s something I’d look at if I were ever considering another job,” he admits.

Through sunny economic times and otherwise, hiring and keeping good employees — especially managers — is a challenge for small firms. Lacking the predictable cash flow of their larger corporate counterparts, most small business owners are reluctant to augment their payrolls with the added expense and paperwork of a generous employee benefit plan. Many find soaring health insurance premiums burdensome enough, let alone the administrative, financial and legal obligations that accompany a retirement plan.

Roger Jones, Beasley’s boss at Bedford Printing, spends about $600 a year administering his company’s 401k plan, which does not match any portion of employees’ contributions. It also requires time on his part to handle the necessary paperwork. “I frequently consider whether or not to keep it,” says Jones, who also contributes to his own retirement account under the plan. In the end, however, Jones figures the plan is worthwhile if it keeps valued employees such as Beasley satisfied.


Know Your Options

Company-sponsored retirement plans have become more accessible to small firms in recent years, thanks to a combination of regulatory changes and heightened employee awareness of the need to save. “If you’re convinced your business needs a retirement plan, there’s an option out there for you,” according to Renata Lynn, a Cary-based CPA who counsels smalls business owners through the North Carolina Small Business Center Network, part of the state’s community college system.

There are, in fact, numerous paths employers can pursue before launching a full-blown 401k, says Lynn. Two options worth considering are a Simplified Employee Pension (SEP) and a Savings Incentive Match Plan for Employees (SIMPLE), both of which operate with minimal paperwork under the umbrella of an Individual Retirement Account (IRA).

SEPs are ideal for firms with fewer than 10 workers. Employers make tax-deductible contributions for all eligible employees up to a limit of 25 percent of income, or $41,000 in 2004. Inside those parameters, employer funding of SEPs is flexible. In robust years, a company can boost contributions to the limit, according to Lynn, simultaneously rewarding workers while minimizing what it has to cough up for Uncle Sam. During lean spells, employers can roll back SEP contributions or forego them entirely. Vesting, the number of years a worker must participate in a plan before earning a stake in its benefits, occurs immediately. For that reason, SEPs may have limited effectiveness as a long-term employee retention tool, according to financial consultant Sara Conway of Culpepper Investment Group in Kinston. “Another disadvantage is that employees themselves cannot contribute,” she says.

But the costs of operating a SEP are rock-bottom. Wachovia Securities, with which Culpepper is affiliated, charges a scant $35 per year to administer a SEP, says Conway. Ordinary investment costs such as mutual fund loads and annual “12-b-1” maintenance fees may also apply, she says.

SEP’s cousin, the SIMPLE, allows employee contributions up to $9,000 annually (“catch-up” provisions allow a slightly higher cap for workers 50 and older). Employer matches can be as much as three percent of salary. But while SIMPLE offers some of the same flexibility of a SEP, its employer matches are mandatory through good times and bad. Vesting occurs immediately, making the SIMPLE a particularly attractive tool for all but the most highly compensated employees. By law, the company must have 100 or fewer employees in order to be eligible for a SIMPLE, though Conway only recommends them for companies with workforces of 50 and smaller.

Profit sharing plans are another popular benefit small companies can offer. Such plans are funded completely by the employer up to a generous annual ceiling of 25 percent of salary or $41,000. As with SEPs, contributions are flexible from one year to the next — and needn’t be made at all. Another feature employers find appealing: profit sharing plans allow vesting schedules. That gives employers the power to tailor their plan to reward workers who remain through the years. “Six-year vesting is common,” says Conway, though she sees plans that vest workers after as little as three years of service. The major drawback for profit sharing plan sponsors (i.e., employers offering them) is the likelihood that they will need to engage the services of a professional administrator to draft a plan document, issue statements to participants and file required paperwork with the Internal Revenue Service (IRS).

Administrative fees as well as all contributions are tax-deductible to the employer, which is the central motivation of many of the clients Conway works with. Regrettably, few small companies view retirement plans as an avenue through which to compete for high-quality labor. “Benefits mean a lot,” she says. “Employers don’t realize employees are looking at that.”


Get Good Advice

Employee benefits as a whole is an area where most small firms drop the ball, according to Jim Carland, a professor of entrepreneurship at Western Carolina University. “I don’t see many small companies doing a very good job with benefits,” he says. Many design self-serving plans around their own needs, while others see the paperwork involved and throw up their hands. But there is an inevitable point in the growth of a business where a sound retirement plan should enter the picture, Carland says, and that typically occurs when owners introduce a layer of professional management between themselves and their workforce. “Most people don’t realize just how tough it is to recruit good managers,” he says.

Accountants such as Lynn and investment professionals such as Conway are good initial points of contact for business owners interested in starting a retirement plan. Full-service bankers can be another knowledgeable resource. “A bank is a good place to get free advice,” says Walt Jennette, senior vice president and manager of the Estate and Trust Management Group at First Citizens Bank in Raleigh. Often, the design and maintenance of a retirement plan is a team effort, Jennette says, requiring consultation with several outside experts.

Jennette cautions business owners not to adopt a pension plan without first considering the financial and non-financial obligations it will entail. “It’s not only the expense associated with it, but there will be substantial time and opportunity costs involved,” he says. Additional staff meetings will be needed, for example, and ongoing energies will be expended getting employees enrolled. “It’s a substantial commitment,” Jennette says.

His advice to those new to the world of retirement plans: start small. He likens the process of implementing a plan to that of purchasing a car. Any model will provide basic transportation, but there are also options to be weighed. “As the plan gets larger and becomes more mature, you can add the bells and whistles,” he suggests.


How Much Should You Match?

For businesses seeking a retirement plan that can help them gain the attention of potential employees, 401k plans might represent an ideal option. For one reason, they are familiar to most people. About 42 million Americans are enrolled in 401k plans, according to the IRS, with the assets inside them now surpassing $2 trillion in value. “Employees have come to expect 401k plans,” according to Terri Vaughan, vice president at the Winston-Salem office of Aon Consulting, a global human resources firm.

Named for the section in the IRS code authorizing them, 401k plans began as an obscure product of the Revenue Act of 1978. They quickly grew in prominence during the 1980s as companies shed old-style “defined benefit” pensions that promise to replace a portion of salary for life upon an employee’s departure from the workforce. The popularity of 401k plans stems from their features allowing employee contributions and portability. As Americans now skip across a patchwork of jobs and careers during their working lives, they can take retirement plan assets with them. Such was not always the case with traditional defined-benefit pensions, which set relatively high vesting schedules. What makes 401ks appealing to employers, says Vaughan, is the considerable flexibility allowed in their design.

For 2004, employees can invest up to $13,000 in their 401ks, a figure set to creep up by $1,000 each year through 2006 (“catch-up” provisions nudge the ceiling even higher for those over 50). Employers may opt to match some or all of their workers’ contributions as cash flow and tax liabilities warrant, provided all employees are treated identically. Regular testing for “discrimination” in favor of higher paid staff, inadvertent or otherwise, is required by law and accounts for annual administrative costs that can easily reach $1,500.

When 401k plans were still in their infancy, it was not uncommon for employers to offer a dollar-for-dollar match. Today, the average match is half that — 50 cents on the dollar up to six percent of employee salary, according to Aon. Even that is a stretch for firms such as Bedford Printing, which doesn’t offer a match. Still, 401ks offer a low-cost vehicle through which workers can save and invest.

There is, to be sure, a definite connection between matching levels and the willingness of employees to participate. Aon’s research shows that moving from no match at all to a modest match spurs a 30 percent increase in plan participation, though even the most generous matching levels won’t inspire complete participation. “The reality is that every employee isn’t going to participate,” Vaughan says.

Like graded vesting provisions, the matching feature can be an effective employee retention mechanism. “The match can be flexible to allow more generosity toward employees who’ve been around a while,” explains Caryn McNeill, a partner with the Raleigh law firm of Smith Anderson. Other plan provisions popular with employees are features that allow borrowing and “hardship withdrawals” from the 401k balance. “Employees definitely like loans, though it may not always be in their best interest to take them,” McNeill says.

Recent surveys of small companies in North Carolina by Capital Associated Industries (CAI) show that about 80 percent of 401ks permit loans, while more than 90 percent allow hardship withdrawals. The figures are consistent across diverse types of workforces and deviate little from those of their medium- and large-sized corporate counterparts. “Small companies have to compete with larger companies for workers, so the data doesn’t really deviate too much,” says Joel Mullen, senior compensation consultant at CAI, which conducts the survey every two years.


Examine Your Cash Flow

In counseling companies on plan design, Aon begins by examining the business’s cash flow. “We start with the budget and then try to fit the budget to the needs of the workforce,” explains Vaughan.

One quality Aon looks for, for instance, is the sophistication with which a vendor offers plan participants education and counseling on how to invest their 401k savings. “For many participants of a 401k, it’s the most money they’ve ever had in one place,” says Mike Waltrip, senior vice president at Aon.

Most experts advise consulting an attorney knowledgeable about retirement plans. “When working on plan design, we’re always talking with legal counsel,” says Gene Lewis, vice president of retirement plan services at First Citizens Bank. More than anything else, business owners should have a firm grasp of their fiduciary responsibilities, which essentially place them at the legal heart of their plan. “Make no mistake about it, the plan sponsor is a fiduciary,” adds Lewis.

That means seemingly harmless flubs such as being tardy in filing routine IRS and Department of Labor forms can spark costly consequences. Case in point: businesses get socked with a $1,200 fine — per day — for missing the submission deadline on their Form 5500, the basic paperwork associated with 401ks and profit sharing plans. “Quite frankly, that is not uncommon,” Lewis says.

Plan sponsors must be certain they know how to complete necessary government paperwork, agrees Hugh Davis, a Raleigh-based partner with the law firm of Poyner & Spruill. “I’ve seen documents given to a client without any guidance on how to fill them out,” he says. That occasionally is because sales representatives working with the sponsor lack a clear understanding themselves of the technical aspects of a plan, and it is among the reasons to involve a CPA, attorney or bank trust officer when launching a plan, Davis advises.

“Whoever you’re dealing with, you should understand how that person is compensated,” says Davis. “If you’re going to go the whole nine yards with a 401k, you really need some independent advice from an accountant, lawyer or fee-based financial consultant,” Davis suggests. “The legal system doesn’t give the small employer an effective remedy if they’ve been sold a bad plan or if a saleperson has done a poor job.”

It also pays to talk to other business people about their experiences with various plans, plan vendors, and financial and legal professionals, Davis says. “Go to Rotary and chamber of commerce meetings and ask peers about the advice they’ve gotten,” he says.




Maybe You Can Afford to Send Workers to College
Higher education is expensive no matter how you slice it. But for many attending North Carolina’s colleges and universities, some or all of their tuition and fees are reimbursed as an employee benefit. And their number is not limited to those employed by large corporation.

“The most important asset for any size business is human capital,” says Jim Carland, a professor of entrepreneurship at Western Carolina University. “And it pays to invest in getting the most out of that asset.”

Section 127 of the Internal Revenue Code authorizes tuition reimbursements of up to $5,250 per employee per year when the education is related somehow to job duties. That expense, deductible by the employer, flows to the employee without tax consequence. “The same anti-discrimination rules apply for tuition reimbursement as do for retirement plans,” explains Caryn McNeill, an employee benefits attorney and partner at Smith Anderson law firm in downtown Raleigh. In other words, plans must treat all workers the same, regardless of their pay-grade or role with the company. “These plans are not especially tricky to set up,” says McNeill. Third-party administrators can help small companies manage tuition reimbursement plans, just as they handle the requisite forms and statements for health insurance and other benefit programs.

Employers are allowed considerable flexibility in tailoring a tuition reimbursement plan, according to Mark Halloway, a senior vice president at Aon Consulting’s Winston-Salem office. Some firms require the course to be part of a relevant curriculum, for example, and a company can set eligibility to begin once a set period of employment has been completed. Programs might reimburse only for credit-hour courses at accredited institutions or can recognize continuing education classes and non-credit seminars. “It’s really all over the board,” Halloway says. In most instances, employees must gain approval for the offering from their supervisor.

Since workers front payment for tuition and fees under such plans, most colleges and universities have little way of knowing what portion of their receipts flow in as part of an employer-sponsored program. But it’s clear some curricula see heavier concentrations of such enrollees than do others. At UNC Charlotte’s Belk College of Business Administration, between 50 and 75 percent of MBA students say they receive some level of tuition reimbursement. Amounts range from half to 100 percent of tuition. “Some companies require students to earn a grade of ‘B’ or better before they reimburse,” according to Sasha Trosch, director of communications and community affairs at the university. “One student last fall reported that the amount of company reimbursement varied depending on his grade.”

Without knowing for certain how workers will react to a newly implemented tuition reimbursement program, it is best for small companies to begin with a modest design and add benefits as experiences dictate. “It’s a good idea to ease into it,” advises McNeill. “The most motivated employees will take advantage of it.” — Lawrence Bivins


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