The logic behind an employee-bonus plan that uses retirement-fund contributions in place of cash.
Would your employees revolt if you shared profits through retirement-fund contributions instead of cash bonuses? The corporate benefits may offset the grumbling, asserts Daniel Maul, president of Retirement Planning Associates, a consulting firm in Kirkland, Wash.
Here's the logic: "Both bonuses and employer-retirement contributions are tax-deductible," says Maul, "but retirement contributions qualify for another important tax break because they're not subject to payroll taxes." Maul calculates that the payroll-tax savings on $10,000 worth of contributions would add up to about $1,600 -- more than enough to cover the administrative costs associated with handling that addition to a 401(k) account.
Also, notes Maul, "when you make a contribution to a retirement plan, your staffer gets the full value of that gift, without losing any of it to taxes, as would happen with a bonus." Meanwhile, tying your retirement contributions to a vesting schedule will probably reduce turnover.
Maul doesn't expect companies to stop paying bonuses entirely -- they're much too popular. But combining cash and contributions can be profitable for employer and employee alike. "If you've had a good year or quarter, you can make retirement contributions to each employee's 401(k) plan and then supplement those with cash bonuses that recognize stellar performance."
Just remember: employers' retirement contributions cannot discriminate among employees, so you'll have to pay each 401(k) account the same dollar amount or percentage of salary. For other 401(k) tips, consider Maul's audiotape, "Solving the Retirement Puzzle" ($19.95; call 800-546-5406 for information).