For most organizations, compensation is one of the largest expenses. Therefore, it is important to carefully plan your organization’s compensation strategy to both maximize benefits to employees and further the goals the organization.
Compensation planning goes far beyond the salaries your employees receive. Compensation is comprised of salary, bonuses, benefits, retirement offerings and fringe benefits, and each component must be managed carefully. Compensation planning takes a detailed look at each of the components of a compensation package to ensure an organization is maximizing benefits while staying in compliance.
Your company’s 401(k) plan provides many benefits for employees, most importantly the ability the grow wealth and retirement savings, tax deferred. Setting up a 401(k) plan provides an attractive benefit for both current and future employees.
While setting up a 401(k) plan is relatively easy, it also carries a significant responsibility. It is important that the plan meet all federal requirements including:
- A properly executed and approved written plan that documents specifics.
- A trust for the plan’s assets.
- A recording system for the plan.
- Documenting and distributing plan information to employees.
The compensation planning team at Smolin has decades of experience in advising clients in developing and implicating 401(k) plans to meet the ERISA specific needs. It is not recommended that an organization attempt to create a plan without professional assistance. Missing a crucial step can have costly implications for your organization and its employees.
As the company grows, your organization’s fiduciary requirements in regards to your 401(k) plan will also change. Once the number of eligible participants in your company’s plan reaches 100, federal requirements dictate the plan must be audited annually. There are strict guidelines regarding when audits must occur and what must be examined by the auditors. Audits must be performed by an independent accounting firm and are required to review:
- Compliance: This portion of the audit verifies that the plan is in line with all IRS and Department of Labor requirements.
- Reporting: All plan reporting must be reviewed in order to verify accuracy, adherence to reporting requirements and documentation of necessary disclosures.
The Smolin team provides quality ERISA auditing services to ensure your organization’s 401(k) plans are in compliance.
Qualified plans are retirement plans that are recognized by the IRS. This designation allows contributions by the company and employee to be made on a pre-tax basis. This means that funds placed into a qualified plan are not taxed at the time of the contribution. Instead, proceeds of the plan are taxed when they are withdrawn.
There are two distinctive forms of qualified plans:
- Defined benefit: These plans guarantee that employees will receive a certain payout. The employer is burdened with ensuring that funds in the benefit plan are sufficient to meet future obligations
- Defined contribution: In defined contribution plans, payout is directly related to the funds an employee contributes into their plan and the performance of their investment. Although employers may make contributions, they are not responsible for the performance of these plans.
Qualified plans are available in a number of ways, each of which offers a different methodology for funding retirement savings. Common qualified plans for smaller businesses include:
- SEP IRA: Simplified Employee Pension IRA provides a way for small businesses to offer retirement plans with limited disclosure and reporting to the IRS.
- SIMPLE IRA: Savings Incentive Match Plans for Employees are available to businesses that have less than 100 employees. There is a mandatory employer contribution on these plans which many not be combined with other retirement offerings.
- Profit Sharing: Ideal for organizations who are seeking flexibility, profit sharing plans allow employers to make contributions on their own schedule.
All qualified plans require annual filing with the IRS. While audits are only required after a plan is seen as being “large”, it is important to maintain detailed records in the event of an audit.
Working with expert, professional consultants who focus on compensation planning provides your organization with the foundation it needs to provide qualified plans as benefits while remaining fully compliant.
A key aspect of compensation planning is the creation of an executive compensation plan. Executive compensation must attract quality talent while protecting the organization’s financial standing. Executive compensation planning should include:
- Adherence to Company Philosophy and Culture: Compensation should be designed in a way that makes an executive personally invested in the success of the company. This can be achieved by cash, option or stock bonuses that are directly tied to company performance. Smolin’s team of consultants, and their industry expertise, can help to design a compensation package that protects the company while offering a competitive executive package.
- Pay for Performance: In order to be a successful motivating factor, executive compensation must be directly related to the success of an organization. Therefore, it is important to establish metrics that adequately measure company performance and can be relied upon for compensation purposes.
- Benchmarking Executive Compensation: In order to understand what it takes to attract and retain talent, you must understand the landscape of the industry at large. It is important to look at organizations that are similar in size and income in order to create a benchmark for executive compensation. Evaluating how competitors are compensating their executives is an ideal way to ensure your organization remains competitive.
- Severance and Retention Agreements: Our team of compensation experts can provide guidance during severance and retention negotiations. Retention agreements specify each executive’s duties, as well as documents salary and other forms of compensation. A qualified compensation planning consultant can create documentation that fully details the compensation package and outlines what is to occur in the event of severance. The Smolin team will work with your organization’s senior leadership and outside consultants and attorneys to develop an agreement that serves the needs of the organization while providing executive benefit.
Smolin offers compensation planning services that are tailored to the unique needs of your organization. Receive additional information on how compensation planning can benefit your organization by contacting Smolin today.