Jacquie owns a small boutique fashion business in New York City. Fashion is a tough business. Trends change quickly and working capital needs are high. Jacquie has been successful, but she was struggling lately because she kept losing talent. It was so costly to keep hiring and retraining people, but she could afford the cost of benefits. We were brought on to help her with retention. We did some digging to see if the SECURE Act might help her. Here’s what we learned.
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Jacquie’s Retention Issues
This is going to sound very familiar to most small business owners. Many of Jacquie’s employees wanted health insurance and retirement benefits. We’ve covered both in the past, but we were curious about how the SECURE Act might help Jacquie. It’s been billed and hyped as major legislation to help small businesses, so we want to know if it might help Jacquie with one of her key issues. When your employees (and you) live paycheck to paycheck, things like this are important.
What Does the SECURE Act Do?
In plain English, the SECURE Act enables small businesses to offer Simple IRA plans with a few key advantages.
- No administration costs unlike 401(k)s
- Employers only fund matching is only up to 3%.
- Higher contribution limits than Traditional IRAs as it allows up to $13,000 in deferred salary
- No compliance testing, which is burdensome for most small businesses
- Allows part-time employees to participate
- Provides a maximum $500 tax credit for instituting one.
Now, nothing is free. So, if you offer this plan, there are a couple of drawbacks.
- More people are eligible, so there are higher matching costs
- Match costs are mandatory. You are required to match 2% of everyone eligible, whether or not they participate or up to 3% of those who do.
What Did This Mean for Jacquie?
The cost to hire and train an employee was around $2,500 for Jacquie. Plus, an added $2,000 or so in opportunity cost as that employee got up to speed. Together that’s around $4,500 per new employee. Jacquie’s average annual salary was around $50,000 for a full-time employee and $30,000 for a part-time employee. Her turnover rate was around 20-25%.
There is a little math here, but it is important. So, we had to weigh the cost of the Simple IRA vs. the cost of retraining. Jacquie has around 15-20 employees. She lost about 3-5 a year. Therefore, the turnover cost was between $13,500 – $22,500 per year. Her total payroll was around $700,000 per year. The cost of the Simple IRA would be $14,400 using the 2% method, less the $500 credit. So, in total, it was going to be around $13,900. We did this as the worst-case scenario as it is very difficult to estimate how many people will participate.
The Simple IRA Wasn’t the Solution for Jacquie
Given the cost was around $13-14 K, her turn-over would have to drop from 3-5 a year to 1-2 a year for it to payout. It didn’t seem reasonable to believe that we would see a 50% reduction in retention rate from just offering a retirement plan.
Unfortunately, Jacquie wasn’t in the financial situation where she could afford additional costs. Therefore, while she wanted to do it, she could not. It was frustrating, but it was the right call to prevent instant failure. We may revisit it in the future once there is more data on the success or failure of the program. It just didn’t make sense for Jacquie to be an early adopter while she is struggling.
A SECURE Act Summary
While the Simple IRA might be perfect for some businesses, the mandatory contributions can make it costly if you have higher-wage employees. While nice, the tax credit doesn’t do much to defray the cost. It’s great to have the option. It will just depend on your financial situation whether it makes sense.
At ProStrategix, we know you have concerns. We’re designed to help give you the business support you need so you can focus on doing what you love. If you would like to learn about how we might be able to help you, please contact us.