Attracting Skilled Labor With Retirement Opportunities

THOMAS PIERCE, CPA

The Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0) makes it easier for employees to save for retirement by increasing contribution limits and expanding hardship withdrawals. It also offers tax credits and other incentives for employers that adopt new retirement plans and authorizes plan enhancements that can help employers boost participation in existing plans. Here are key provisions for employers to consider.  

Small employer tax credit

SECURE 2.0 expands the existing tax credit for small employers that start new retirement plans. Starting in 2023, employers with up to 50 (down from 100) employees may claim a credit equal to 100% (up from 50%) of their qualified start-up costs. The credit is generally capped at $5,000 per year.

These employers are also entitled to an additional credit of up to $1,000 per employee for employer contributions to the accounts of employees earning $100,000 or less. For employers with more than 50 employees, the credit is reduced by 2% for each employee in excess of 50, and fully phased out at 100 employees. The full credit is available in the year the plan is established and the following year. After that, it decreases by 25% each year and is eliminated after year five.

Plan participation financial incentives

Boosting retirement plan participation by rank-and-file employees can provide many benefits. Examples include easier compliance with nondiscrimination requirements, improved employee satisfaction and retention, enhanced tax benefits and cost savings. Previously, plans were prohibited from offering financial incentives (other than matching contributions) to encourage participation.

Now, however, SECURE 2.0 allows employers to offer participants “de minimis” financial incentives, such as low-dollar-value gift cards. Keep in mind that these incentives usually are treated as taxable income to the employee.

Penalty-free emergency distributions

Employers may now amend their plans to permit penalty-free distributions, up to $22,000, for participants who suffer economic losses related to a federally-declared disaster. Participants may spread the resulting income tax over three years. Or, if they repay the distribution within three years, participants may avoid the tax altogether.

SECURE 2.0 also permits employers to establish emergency savings accounts for rank-and-file employees, linked to a 401(k) or similar plan. These accounts may accept only after-tax contributions (although they are considered contributions to the linked plan for matching purposes). Account balances must not exceed $2,500. And withdrawals, which must be permitted at least monthly, are tax- and penalty-free.

Related Read: SECURE Act: New Tax Incentives for Employers to Offer Retirement Benefits

More ways to attract employees

Other SECURE 2.0 provisions that can help employers attract skilled labor include:

• Expanded Coverage for Part-Time Workers
  Currently, part-time employees are eligible to participate in a 401(k) plan if they complete at least 500 hours of service for at least three consecutive years and meet certain other requirements. SECURE 2.0 reduces the service requirement from three to two years for plan years beginning after December 31, 2024.
• Election of Roth Treatment for Employer Contributions
  Plans (other than SIMPLE IRA plans) may now permit participants to elect to treat fully vested employer contributions as Roth contributions. Offering this option would require a plan amendment, and such contributions will be taxable to the employee at the time they are made.
• Matching Contributions for Student Loan Payments
  Starting in 2024, employers may amend their plans to treat qualified student loan payments as elective deferrals for matching contribution purposes. This can be a valuable benefit for employees who would otherwise have to choose between paying down student debt and deferring salary to receive matching contributions.
• Mandatory Automatic Enrollment for New Plans
  Starting in 2025, new 401(k) plans (those established on or after December 29, 2022) will be required to automatically enroll participants at an initial contribution rate of 3% to 10% of compensation, unless the participant opts out. The contribution rate will be automatically increased by 1% per year until it reaches at least 10% (but no more than 15%), unless the participant elects a different contribution level.
• Increased Catch-Up Contributions
  Starting in 2025, employees between the ages of 60 and 63 will be permitted to make catch-up contributions to a 401(k) plan up to $10,000 (adjusted for inflation) or 150% of the regular catch-up amount, whichever is greater. As an example, using the current catch-up amount for employees over 50 ($7,500), employees from 60 to 63 would be able to make catch-up contributions up to $11,250 ($7,500 x 150%). For plans that use the IRS’s model catch-up contribution language, this change will happen automatically. Some employers may need to amend their plans to allow these contributions.

Review your plans

Enhancing retirement benefits can be an effective tool for attracting and retaining skilled workers — a major benefit for manufacturers that are having a hard time filling open job positions. However, taking advantage of some SECURE 2.0 provisions may require plan amendments. Check with your ORBA advisor to review your plans and update if necessary.

Related Read: SECURE Act: Changes to 401(k) Plan Eligibility and Vesting for Part-Time Employees

Sidebar: Time to consider a starter 401(k) plan

If your company does not currently maintain a retirement plan, the new “starter 401(k) plan” is an option that can be easier and less expensive to administer than a traditional 401(k) plan. SECURE 2.0 authorizes these “deferral-only arrangements” starting in 2024.

Starter 401(k) plans must automatically enroll employees at a contribution rate of 3% to 15% of compensation (unless an employee elects otherwise). Employer contributions are prohibited, and employee contributions are limited to $6,000, plus $1,000 in catch-up contributions, for those 50 or older.

Plans that meet these requirements are not subject to costly nondiscrimination requirements, such as average deferral percentage testing and top-heavy plan rules.

For more information, contact Tom Pierce at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Manufacturing and Distribution Group.

Segmented Income Statements Can Help Enhance Profitability

HARRY FOX, CPA, CVA

Most manufacturers issue companywide income statements, but have you considered digging a little deeper into your numbers with a segmented income statement? If properly designed, a segmented version of this report can be used to improve your bottom line.

Dissecting your operations

A conventional income statement starts with revenue and then subtracts costs to arrive at a net profit or loss. These typically are sufficient for lenders or other third parties to evaluate your company’s financial performance. However, your management team might want more granular data.

A segmented income statement provides additional detail, breaking down revenue and expenses by business unit, such as product line, location, department, salesperson or territory. This breakdown helps management identify underperforming segments and develop strategies for boosting profits.

For example, if your business manufactures multiple products, you could create segments made up of similar products. Your segmented income statement would clearly show which product lines are the most and least profitable. This insight could be used to guide expansion or divestiture decisions.

Assigning costs

Creating a segmented income statement can be challenging, because you must assign and allocate costs to various segments. Direct costs are those costs — such as direct labor and materials — that relate directly to the business segment. If a cost would be eliminated if the segment were eliminated, it is a direct cost.

In addition to these direct costs, you will need to allocate to each segment a portion of the company’s indirect costs, such as rent, insurance, utilities and executive salaries. Also known as overhead expenses, indirect costs are allocated based on the extent that a segment benefits from or drives those costs. For example, you might allocate indirect costs based on segments’ relative revenue, units sold, direct labor hours or floor space occupied. Different methods may produce substantially different results, so carefully select a method that fairly reflects each segment’s consumption of resources.

Related Read: Why the Segmented Income Statement is a Powerful Management Tool

Assessing the results

By uncovering business units that are underperforming, segmented income statements can help remedy profit drains. Depending on the reasons for a segment’s poor performance, potential strategies might include:

• Increasing prices;
• Reducing costs;
• Addressing quality or design issues; or
• Eliminating a segment.

Beware: Just because a segment is operating at a loss does not necessarily mean that eliminating it will benefit the company. In some cases, terminating an underperforming segment can cause the company’s overall net income to go down. How is that possible? A seemingly unprofitable segment absorbs some of the company’s indirect costs and may still contribute to the company’s net income and, in fact, help drive revenue from other, more profitable segments.

Evaluating contribution margins

Before eliminating an underperforming business segment, it is important to understand the concept of “contribution margins.” Here is how it works. Most indirect expenses allocated to a segment, as well as some direct expenses, are fixed. That is, your company will continue to incur them even if you eliminate the segment. So, even if a segment is operating at a loss, you are likely better off retaining it (at least in the short term) if it contributes to companywide net income.

To determine whether a segment is making a contribution, calculate its contribution margin (revenue minus variable costs). Variable costs are those that increase or decrease with the level of production output and, therefore, will drop to zero if a segment is shut down.

If a segment has a positive contribution margin, then it is contributing revenue to absorb the company’s fixed costs and increase profit and is probably worth keeping. If not, it might be time to pull the plug.

Valuable insight                    

A segmented income statement can highlight key performance drivers and possible improvement strategies. It can help manufacturers make better decisions using more transparent and understandable segments. For help determining how to segment your revenue and allocate costs among those segments, consult your CPA.

For more information, contact Harry Fox at [email protected] or call him at 312.670.7444. Visit ORBA.com to learn more about our Manufacturing and Distribution Group.