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Health Care and Retirement Plans for Employees posted on Monday, 30 November 2009

Small business owners are looking to strike a healthy balance between managing their business expenses and providing attractive incentives.

Amid mounting health care costs and the premium placed on having a viable retirement account in this economic climate, small business owners are looking to strike a healthy balance between managing their business expenses and providing attractive incentives such as health and retirement accounts to help promote morale and retain valued employees.

While offering these benefits can be beneficial for both your business and your staff, it is important to carefully research which retirement and health benefit options are most practical and affordable for your business’ needs.

Consider the potential benefits of these retirement plans:

• Simplified Employee Pension (SEP) IRA. A SEP IRA is an employer-sponsored retirement plan that uses IRAs to minimize cost and paperwork. Each employee sets up a SEP IRA, a tax-deferred retirement account. A business or self-employed individual makes tax-deductible contributions to the SEP IRA. Once an employer makes a contribution for an employee, the funds belong to the employee and are subject to traditional IRA rules.

Employer benefits. For employers, the tax benefits of the SEP IRA include: contributions that are tax-deductible business expenses; flexibility on how much to contribute, up to the IRS-imposed limitations, or whether to contribute at all; and a retirement plan that is easier to set up and more economical to administer than a 401(k) plan.
Employee benefits. For employees, the advantages of a SEP IRA include contributions and earnings that are tax-free until withdrawn. You must begin taking money out of your SEP IRA by April 1 following the year in which you turn 70 1/2.

• 401(k). A 401(k) is primarily an employer-sponsored retirement savings plan that enables employees to contribute part of their pre-tax income to a retirement account with savings that are not taxed until withdrawn. Employers can match employees’ contributions if the employees are eligible or offer a profit sharing option. Keep in mind that there is typically a limit on the amount of the contributions an employee can make toward a 401(k) account.

Employer benefits. Employers offering a 401(k) plan can receive a tax deduction and determine the amount of the contribution they would like to make toward their employees’ plans. A well-matched 401(k) plan can also promote employee retention and appeal to prospective job candidates.
Employee benefits. Employees have the flexibility to determine how much pre-tax income they would like to contribute toward the plan up to certain limits and may have the choice to select their investments.

Among the health care plans employers may offer are health savings accounts (HSAs) and Health Reimbursement Arrangements (HRAs).

• HSA. A health savings account is a personal savings account enabling individuals or their employers to make pre-tax contributions to the account up to the established limits. Individuals control their accounts and must be enrolled in a qualified, high deductible health plan—an insurance plan with a higher deductible than standard plans—to have an HSA account. Contributions and interest earned on the account are tax free.

Employer benefits. HSAs are economical for employers, as they save on administration costs and provide employees with more options and control over the health care, which in turn, may boost morale.
Employee benefits. Individuals control their HSA accounts and may draw from the account to cover qualified medical fees. Employees can also roll over their remaining balances from year–to–year. Employees retain control of the account even if they leave their job.

• HRA. Health reimbursement arrangements are employer-funded accounts that may be used to reimburse employees for qualified medical expenses. Unlike the HSA, when an employee leaves, they do not take the plan with them. It is important to note, however, that self-employed individuals are not eligible for HRAs.

Employer benefits. The amount of employee reimbursement for qualified medical expenses may be tax deductible to the employer and employers have the flexibility over the plan they wish to provide.
Employee benefits. The contributions made by employers is tax free to employees and the funds that accumulate for each employee will rollover each year as long as the employee does not leave to work with another employer.

Consult your tax advisor for complete details about eligibility, tax benefits and requirements for each of the above plans.

Joseph Benoit is the small business banking executive for Union Bank, N.A., a full-service commercial bank providing an array of financial services to individuals, small businesses, middle-market companies and major corporations. The bank has 335 banking offices in California, Oregon and Washington, and two international offices.

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