Employers can make contributions to a pension plan for an employee, but are not obligated to. Certain pensions, called defined contribution plans, allow employer and employee contributions to have a very specific formula for determining how much the employer must contribute, if they decide to contribute to the employee's plan. As an employer, you must know these calculation rules, because violating them could lead to plan termination. If your employees' plan is terminated, your employees will need to find another way to save money for their retirement.
Make a contribution to each retirement account by paying a fixed dollar amount regardless of your employees' salary. For example, make a $350 per month contribution to your employees' retirement account.
Determine your employees' salary. Then, make a deposit into each of your employees' accounts based on a fixed rate or percentage of the employees' salary. For example, an employee earns $50,000 per year. You decide to contribute 3 percent of his salary to his retirement account. This means you must contribute $1,500 to his retirement account. You must contribute the same percentage to every employee regardless of their pay. This means that each employee will receive a different contribution based on his or her salary, but the percentage will remain the same for everyone. This type of contribution is known as profit sharing or a discretionary employer contribution.
Determine how much your employee contributes to the pension plan. Then, base your contribution on the amount of money your employee contributes to the plan. This type of contribution is known as an "employer match," because you are matching your employees' contributions. You must keep the contribution the same for every employee. For example, you can contribute 25 cents for every dollar that an employee contributes to his retirement plan, but this matching contribution must be the same for all employees. In other words, you must offer 25 cents on the dollar for all employees. So, if an employee contributes $100 per paycheck, then you must contribute $25 to that employee's retirement plan.
- "Practicing Financial Planning for Professionals"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007
- IRS: Retirement Plans for Small Business
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