Things to Know About PSP’s
When it comes to PSP’s, there are two types to consider. Deferred plans are a good choice to attract employees who you want to be around for a while. These plans are designed to get employees to the maximum IRS pre-tax contribution rate. Note that they can also be tied into a 401(k).
The alternative is a cash plan where you pay the bonus directly to the employees – after-taxes – with the goal of motivating them to continue to make the business grow as successful as possible.
One big thing to remember is that only the employer can contribute to the plan and the employees do not get to determine their own deferrals. There are maximum contributions for each employee that are determined by the IRS but the employer still has a lot of room when it comes to tax planning. Deposits don’t have to occur until after the close of the year so the employer can avoid over or under-committing.
Deciding What’s Right For You
While there are advantages to PSP’s, you have to consider any downsides before deciding if they’re right for you and your small business. It helps to talk with a financial advisor to help you run through all of your options but here are some general situations in which a PSP might be a good fit.
● Businesses hoping to attract talented people who prefer annual contributions
● Single-owner or family-owned companies
● Companies looking for tax advantages without the burden of too many payroll processes
● Companies that already have a simplified employee pension in place that want more flexibility when it comes to distribution and eligibility requirements
Again, there are a lot of plus sides to using a PSP. If it’s the only plan you have, you may not have to worry about any additional payroll procedures and you have control over annual contribution amounts. Both employees and owners may benefit and everything is generally taxed after distribution. But, they can also be expensive for the employer and frustrating to employees who cannot control their own deferrals.
Talk to a financial planner to learn the ins and outs of PSP’s to see if one is right for you.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making a decision, and it does not constitute a recommendation. Any opinions are those of Thomas Fleishel and not necessarily those of Raymond James.
Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.