Retirement Plans for Restaurants
We have helped a number of restaurants and restaurant chains establish or update their 401(k) retirement plans. Unlike other industries, this one has some unique issues to be addressed -- e.g., high turnover, low wages, low participation, young employees, part-time employees, rehires, etc. This article will summarize some of the major issues and solutions to those problems.
Because young employees and part-time workers are generally less likely to contribute to the plan, which will negatively impact the 401(k) nondiscrimination testing, it is usually desirable to exclude them from participation by invoking the most restrictive eligibility options. For this reason, we normally recommend that the employer use eligibility provisions of 1 year of service (with 1,000 hours) and age 21. More liberal rules are always permitted; and any restriction applied to the rank-and-file must also be applied to the Highly Compensated Employees (HCEs) – generally those owning over 5% of the company or having prior year pay exceeding $115,000.
To share in the company contribution for a given year, the plan could also require 1,000 hours of service during the plan year and employment on the last day of the year as conditions for receiving the contribution. However, this particular provision needs to be tested for coverage to be sure that a sufficient portion of the rank-and-file (who have met the eligibility provisions) will benefit from the contribution. The company would need to assess whether its turnover history is high enough each year that it might create issues with coverage among the group of employees that do become eligible for the plan. If so, then it would be advisable to use a lower allocation requirement, like 500 hours and no end-of-year employment, with the understanding that this will cause more people to receive the allocation and therefore be more costly to the company.
Sometimes the owner is more interested in focusing on a select group of non-HCEs, e.g., managers and cooks, and is willing to exclude owners and other HCEs in return for the right to exclude all employees except the target group. This is permitted since the plan would not cover any HCEs and could thus never be deemed discriminatory in favor of the HCEs. This is a common approach that we see many restaurants use to ensure there are no testing issues in the plan.
We have also seen cases in which management only wanted to cover employees who were willing to save something on their own for retirement. In these cases the plan could have a matching provision – meaning the employer bears the cost of contributing only for the few who are willing to set aside something for retirement. The employer could also invoke a “safe harbor” match, which permits any HCE to defer up to the annual limit ($17,500 for 2013, plus another $5,500 if the participant is over age 50 by the end of 2013), even if very few or none of the non-HCEs choose to defer into the plan.
There are many considerations to be made when designing a retirement plan for a business and every situation is unique and must be given thoughtful attention. However, the restaurant industry can be specifically challenging. A poorly designed plan can result in low participation, expensive contributions and major frustration for the employer. It is wise for the restaurant owner to spend time up-front meeting with a consultant to carefully consider the employee demographics, the objective of the business for the plan, and the amount of money and time the company has available to maintain the plan. Careful and realistic planning on the front-end can help ensure long-term success of the program. Restaurants with existing plans that are not providing the originally expected results can be reviewed to see if there are changes that could be made to make them more successful. If we can assist you with designing or re-designing your retirement plan, please don’t hesitate to contact us.