By Troy Schneider
The current federal unemployment rate is 3.9%, which is an 18-year low. Farmers are struggling to hire people to work on their farms partly due to the low unemployment rate. Farmers constantly must compete against both farm and nonfarm employers for a limited number of qualified workers. Today, it is more important than ever for farmers to offer their employees retirement funding options as a perk either to recruit them or to keep them.
Farmers generally have not been good at offering employees the same kind of retirement benefits that nonfarm employers offer. Like you, a farm’s employees depend upon the farm for their retirement. This article provides several retirement planning alternatives for farm employers to consider offering their employees: a Savings Incentive Match Plan for Employees (SIMPLE IRA), a Simplified Employee Pension plan (SEP IRA), a 401(k) and a profit sharing plan.
• A SIMPLE IRA is available to employers with fewer than 100 employees. These plans are designed for both the employer and the employee to contribute. Employees can contribute using pre-tax wages, with a maximum annual contribution of $12,500. Employers must contribute one of two ways: Match 100% up to 3% of the participant’s compensation; or contribute 2% of compensation of all eligible employees. A vesting schedule and other conditions of withdrawal are not permitted.
Many retirement benefit plans are subject to discrimination testing. These nondiscrimination tests are called the actual deferral percentage and actual contribution percentage tests. Nondiscrimination testing requires that employees of a certain status (highly compensated employees and key employees) stay within a specific contribution rate, as determined by the contribution rate of nonhighly compensated employees.
Also, many retirement plans may not be top-heavy. A top-heavy defined benefit plan is a plan where, on the annual determination date, the present value of the accrued benefits of all key employees exceeds 60% of the present value of the accrued benefits of all employees.
A SIMPLE IRA is not subject to discrimination testing or top-heavy requirements. In addition, there are no government filing requirements for a simple IRA plan.
• A SEP IRA is available to all businesses regardless of number of employees. Only employers may contribute. The contribution an employer makes to each employee’s SEP IRA each year cannot exceed the lesser of 25% of the participant’s compensation or $55,000. The same percentage based upon compensation must be contributed by the employer to all employees. A vesting schedule and other conditions of withdrawal are not permitted.
Contributions are tax-deductible to employers as a business expense. A SEP IRA is not subject to discrimination testing but cannot be top-heavy. There are no government filing requirements.
• A 401(k) is available to all businesses. Employees can contribute using pre-tax or post-tax wages (Roth), with a maximum annual contribution of $18,500. The employer is required either to match employee contributions (100% of the participant’s first 3% of salary and 50% of the next 2% of salary) or to provide a nonelective contribution (3% of salary for all eligible employees). A vesting schedule and other conditions of withdrawal are permitted.
Contributions are tax-deductible to employers as a business expense. A 401(k) plan is subject to discrimination testing and cannot be top-heavy. There are also government filing requirements.
• A profit sharing plan is available to all businesses. Contributions are made by the employer only and are at the employer’s full discretion. The contribution an employer makes to a profit sharing plan each year cannot exceed the lesser of 25% of the participant’s compensation or $55,000. A vesting schedule and other conditions of withdrawal are permitted.
Contributions are tax-deductible to employers as a business expense. A profit sharing plan is not subject to discrimination testing but cannot be top-heavy. There are government filing requirements.
Employers often tack on a profit sharing plan when they establish a 401(k) to have an additional flexible tool to assist employees’ retirement savings.
In the past, most farms had a limited number of employees who were not expected to work at the farm on a long-term basis. Today, many farms rely upon a large number of hired employees who are more like those found at a manufacturing company. So, it should come as no surprise that more farms, like other companies, are interested in ways to attract and retain talented employees.
As you can see, there are several types of retirement plans to choose from, and the options can be confusing. It is important for farm employers to consider what they are trying to accomplish with a retirement plan. A qualified attorney, accountant or financial adviser can assist the farm employer in choosing the plan type that is most appropriate.
Schneider is a partner in the Chilton, Wis., ag law firm Twohig, Reitbrock, Schneider and Halbach S.C. Call him at 920-849-4999.