Retirement and Incentive Plans – Where do You Start?

By: Jeff Tubaugh and Carl Toppin

When young restaurant companies begin growing, many of them start evaluating retirement and incentive plans to help reduce turnover, incentivize key employees and attract new talent.  The challenge is knowing where to start. While the tax impact of these plans is a big factor, the initial key questions are: “Who do I want to benefit from this plan?” and “How do I want to reward and incentivize them?”

A bonus plan is structured to incentivize the achievement of long-term or short-term goals.  A company employing a bonus structure would issue payroll bonuses to employees based on pre-established goals and performance metrics.  These plans may be broad-based or available to only a few key employees.  At the end of each performance period, management evaluates the extent to which the performance goals were satisfied and the payout amounts.

For restaurants evaluating company-wide retirement savings plans, 401(k) plans are among the most popular to implement.  Employees can defer a portion of their salary into a 401(k) retirement account, and their employer may match the employees’ deferrals for additional savings.  The employer also has the option of depositing funds into employee accounts without them deferring funds of their own.  The benefits of this type of plan are that all employees could be eligible to participate, and company contributions help contribute to employee goodwill and loyalty.  401(k) plans also have favorable tax consequences to both employee and employer – taxation on the employees is generally delayed until distribution, while the employer may claim deductions for their contributions.  However, 401(k) plans also carry significant administrative costs for regulatory compliance related to trust holding and investing the participants’ accounts.  Notably, the employer may impose stringent eligibility requirements on plan participation (such as requiring employees to complete a year of service before entering the plan) in order to minimize the administrative burden associated with managing the accounts of short-term employees.  Also, highly compensated employees could potentially be limited on their deferrals and employer contributions, depending on the participation and contribution levels by other employees.   

A restaurant may also want to consider specialized incentives for key executives, such as nonqualified deferred compensation plans or equity incentive plans. These plans may be structured as long-term incentives, contain vesting conditions designed to retain and motivate employees, and settle in cash or equity (if the owners are willing to share their equity interests).  Administrative costs for such plans, including annual valuations for equity plans and penalties leveraged on employees who do not comply with the appropriate regulations, can be high. Unlike 401(k) plans, the employer’s tax deductions for contributions to nonqualified deferred compensation plans are delayed until the employees claim the benefits as part of their income.  Further, the deferred amounts (including the employees’ own salary deferrals) may be set aside in a trust that is subject to the employer’s creditors in the event of its insolvency. Potentially worse, plans may be funded on a “pay-as-you-go” basis, and employees have no guarantee that the restaurant will be able to make payments when amounts become due.  

Deciding to implement an incentive or retirement plan may be an easy decision. But it’s only the beginning of a long process requiring companies to determine what plan makes the most sense for their organization, what goals they hope to achieve, and how they will successfully implement the plan.

Have questions about retirement and incentive plans for restaurants? Contact Jeff Tubaugh at [email protected] or Carl Toppin at [email protected]. And be sure to keep up with the Practice's latest thoughts by following us on Twitter @BDORestaurant.