U.S. employers with at least 10 full-time employees have a number of options when it comes to rewarding their employees for staying with the firm for a set period of time. One is the pension retention allowance (PRLA). This is a generous employee bonus—one of the top five in U.S. companies. Most PRLA plans are fully taxable, but some are tax-deferred. The employee can receive this bonus as a lump-sum or as a monthly benefit over a certain period of time. The current full-time employees at AICPA member firms, for example, have from 12 to 20 years with the organization, for which they will receive 50 percent of the remaining unused accumulated pension (EAP) assets and their vesting rights.
The other option for employees with 10 or more years at a company is the bonus retention credit (BRC), in which they receive 50 percent of the EAP amount. Once an employee reaches 15 years at the firm, the bonuses become 100 percent EAP and vesting rights. The most generous option in the U.S. is to retain employees for 20 years. To do this, a firm must be operating with at least $500 million of EAPs (the amount is $1 billion in 2015). The employee can receive a 100 percent EAP bonus at this time. This is what a firm may use if it wishes to retain employees for the long term.
The best time to incentivize a full-time employee at the company to stay at the firm is when they are in the critical first 10 years at the company. During these years, the employee will make the highest level of contributions and, therefore, is likely to have the most money at the end of the vesting period. It’s not a bad idea to use this $500 million to retain the employees who are the core of the company’s success in its first 10 years. Because of the aforementioned limits, both the PRLA and the BRC tend to be very popular programs. They are the biggest two for AICPA members. For example, when reporting the 2015 EAP figures, only 55 percent of AICPA member firms had PRLAs and only 45 percent had BRCs.
Issue With Both Programs
Now let’s look at the main issue with both of these programs: The employee must actually stay with the employer for a set period of time in order to receive the benefit. In order to make it worthwhile to stay with the company, the employee needs to be at the firm for at least five years. Not staying with the employer for a long period of time is a negative and a negative for the employer as well. For example, say an employee has five years of service at the firm (which is the maximum under the EAP rules) and receives a 50 percent EAP bonus at the end of the five years.
If this employee stays with the company for a year or two, at most, after the end of the five-year period, the EAP would still be greater than the entire amount received at the end of the five-year period, so the employee would only receive $125,000, not $500,000. Also, say this same employee receives another $200,000 in a bonus two years after their initial bonus. This would be a double-whammy for the employee. Even if they leave the company before their 10 years, the payout is still less than the two previous payments.
Why AICPA Should Eliminate Employee Bonuses?
One can make the argument that if they can’t get full-time employees to stay longer, why bother giving them bonuses for those years? And for the employee who does decide to leave the company, the bonus, of course, does not affect them. However, the company would be able to end or change the EAP or BRC early with only the employee’s signature. With the PRLAs, the employer needs to make a written request to the employee. Not only that, there are some employees who cannot be terminated or reduced in pay in any way due to special circumstances. In the event that the company terminates an employee, the employees will receive the entire EAP bonus (plus interest).
For the AICPA, having these programs is not the best way to make money for the membership. The organization has lost members over the years because of incentives and the need for profits, even if it is just in the event that a part-time employee can’t work full-time. The end-user of these programs is the employer. If the employee is coming in part-time, that’s fine. Give the employee the time to work up to full-time, if they so choose. But for those coming in full-time, have them work full-time and don’t give them any bonuses for part-time.
Why ERC Required More Guidance According to AICPA?
In AICPA Business Policy Manual 2015-2017, section 15.5 (Interagency Retention Review and Retirement Savings Issues), it is clearly stated that the employer and employee must obtain authorization from their agencies to have an ERC program. Further, “Before a business is authorized to do a program, it must consider the risk of excessive and expensive employee turnover, and it must carefully examine whether it would result in substantial net savings or tax benefits for the business, in addition to achieving the objective of greater employee engagement and loyalty.”
So, what does this mean?
It means that an ERC program can only be used when the business cannot cut costs by cutting wages. A payroll system must be in place and audited by the business. It also means that the employee must be taxed at the highest personal rates so they can easily pay for a future retirement. Without ERCs, it is tough for the employee to know when they have the resources and when they don’t. In fact, they could end up working until they are 65 years old or even older just to pay for their retirement, if they had nothing saved.
On the other side, the company would want to know if they have a steady stream of talent. They might even want to be involved with the worker’s 401(k) plan. By having all of the documentation, the business could pay them at the highest personal income tax rate if the employee is an individual. The other issue is that the 401(k) must be well-diversified with the right balance of stocks and bonds to help cover the worker throughout their retirement. It is too early to tell how these programs will be handled at the state and federal level. So, for now, it’s too early to say.
However, it would be wise to consider at least checking into using an ERC or any other type of incentive program to help your business operate more profitably. If they are cut or the employee leaves in the middle of the year, you could lose a month or two of earnings. Start small and only utilize the information that is beneficial for your business. Don’t make the decision based on what you think you want, but how you actually want to operate. Of course, not every business will qualify. Small businesses have very different rules and regulations to follow when it comes to incentives. But, you can always ask.
Why Less Guidance About Employee Retention Credit Were Released to Start the Year?
The AICPA Business Policy Manual for 2015-2017 also states that the U.S. Treasury’s Office of Tax Analysis’s Internal Revenue Service Office, “The reason there was not more guidance was because the Treasury Office did not offer general guidance for a mandatory employer requirement for 401(k) plans (it requires that employers provide an employee option for a company-sponsored retirement plan), and there was no guidance available from the IRS about a mandatory employer requirement for an ERC.”
It also notes, “Most businesses receiving an ERC do not have a company-sponsored retirement plan. Therefore, the IRS was unable to offer guidance on how to determine whether a business receiving an ERC was also exempt from the law governing the use of an ERC.” When it comes to understanding how the state of Ohio is handling tax laws, a little too much “slack” can be a good thing. Here is the official IRS information on both state and federal programs.
The IRS includes the “zeroed-out compensation” as one of the qualifying criteria for IRS-approved ERC programs, under the 2010 and 2015 tax law. “If a plan with participants consists entirely of money that was used to pay participants’ wages, or from a plan in which the employer withheld 20 percent or more of employee pay, and the plan’s contribution is scheduled to ‘zero out’ on the close of the plan year (meaning that all contributions and earned-income distributions are directed to the plan sponsor and that there is no remaining balance to pay into the plan),” the IRS says. This is called a “cost-sharing contribution.”
Next, the IRS has an approved state plan under the 2016 tax law. “Under the 2016 tax law, there are ERCs under the Internal Revenue Code section 401(k) that cover EITC, workers’ compensation, tuition and fees, prepaid tuition, and annuities,” the IRS says. For more information about retirement plans, you can read IRS Publication 535 or go to the U.S. Treasury website.
Why AICPA Dated Legislation to Use for 2016?
The problem was that the AICPA previously released its revenue guidelines for the tax year 2015. For this year, the federal guidelines for businesses to use for tax years 2016 through 2020 was released June 12, 2017. However, the state of Ohio’s guidelines weren’t released until June 30, 2017. The state of Ohio gives “fiscal years beginning on January 1 or on a calendar year.” AICPA’s latest information was for tax years 2016, 2017, and 2018.
AICPA CPA Standards, the code of ethics and state standards can also be used as starting points to evaluate an ERC program and determine if it is right for your business. Here is a listing of a few important factors to consider when evaluating the ERC program.
• The program’s funding requirements, and
• The program’s investment requirements and limits
• The plan’s administration, operation, and administration costs.
• The fund custodian’s liability and investment limits
• Participation levels, and
• Participation payment requirements.
• Plan administration and administration fees.
So, while you may not be able to get tax savings from the ERC plan, you can still look for the guidelines that you can use in evaluating your business for an ERC program. It can be a good way to make sure your company’s employees are covered in the state retirement plan. It can also provide a valuable exit strategy when the time is right. Even though tax laws were revised in 2010 and 2015, there was no advance notice to Ohio businesses about the state’s plan.
Conclusion
Don’t underestimate how many different options there are when it comes to corporate retirement plans. Not all plans are created equal, which makes it a good idea to do your research to find out what type of plan will best fit your needs. Some plans might be high-cost or high-expense, while others might have the most benefits.
Additionally, make sure you consult your tax professional if you are unsure about what the requirements are for a plan you may be thinking about using. Also, if you are planning on paying out retirement benefits, make sure you are using a reliable 401(k) plan that provides sufficient protections for you and your family.
Over the next few months, this column will take a closer look at retirement plans and their various ins and outs. We will talk about retirement products, 401(k) plans, 403(b) plans, 457 plans, IRAs, and taxable-coupon plans. If you have specific questions that you would like answered, let us know by emailing or commenting in below section.
Hopefully, this article will inspire you to look into creating an employee program that helps you to retain quality employees and ultimately improves your profitability.