Labor Pains - 1

Help on the Fringes

Elizabeth Williams
By  Elizabeth Williams , DTN Special Correspondent
Indiana turf farmer Gordon Millar gets more employee gratification by offering a SEP IRA rather than a profit-sharing plan. (DTN photo by Marcia Zarley Taylor)

INDIANOLA, Iowa (DTN) -- Finding and retaining a dedicated farm workforce is a major headache for farm owners, especially if you can't afford the fringe benefits Fortune 500 companies offer. But Lori Culler, owner of Ag Hires, a human resource consulting firm in Temperance, Michigan, encourages farms as small as a few thousand acres to consider retirement plans as a fringe benefit. The administrative costs for small employers are low and plans seem to motivate employees far more than on-again, off-again profit-sharing formulas that fluctuate with farm prices, Culler noted.


Two easy-to-set-up and inexpensive-to-administer retirement plans are a Simple IRA and a SEP (Simplified Employee Pension) IRA. These differ from a traditional IRA in that the employer contributes some or all of the money into the employee's IRA.

"We started out with a profit-sharing plan in the '90s to be competitive in the labor market of factory work in the area, but later converted to a SEP IRA," explained Gordon Millar, who runs a turf and grain farm in north-central Indiana near New Carlisle.

He likes the ability to reward long-term employees, even if they are seasonal. "The benefit kicks in after three years of employment and if they received at least $600 in compensation," he said. "That's great for a company like ours that can't carry every employee full time."

Although younger employees may not appreciate a retirement fund early in their career, they benefit from an IRA account. "We have some team members at Red Hen Turf Farms with young families, and it can be hard to take money out of your check every week to think about retirement," Millar said. "But with the SEP IRA program, we as the employer try to make a substantial contribution as a percentage of their take-home income. It's sort of an 'out of sight, out of mind' game, but the dollars really add up over the years. Every year, we sit down with each employee and go over their hours, pay and additional fringe benefits. When they see the dollars per hour that each of these add, it really makes an impact and it reinforces our commitment to them," Millar explained.


A SEP IRA allows for greater contributions and the contribution is paid entirely by the employer, whereas a Simple IRA has the employee making the bulk of the contribution, explained Joseph Duda, CPA, with CliftonLarsonAllen in Rochester, Minnesota.

In a SEP IRA, the business can contribute up to 25% of the employees' compensation (W-2 income) or 20% of Schedule F farm income. You can adjust the percent of compensation you contribute each year from zero to 25%. It must be the same for all employees. So, if your employee makes $60,000, at the 25% level you contribute $15,000 to his SEP IRA.

The annual maximum dollar amount contribution allowed in 2015 for a SEP IRA is $53,000 (for employees making at least $212,000, or $265,000 for farm owners).

As an alternative, in a Simple IRA, the employer matches dollar-for-dollar what the employee contributes to his IRA with a maximum of 3% of the employee's W-2 income. So, if your employee makes $60,000, you can match up to $1,800 of his IRA contribution.

The employee, no matter how much he or she makes, can contribute up to $12,500 in 2015 to a Simple IRA, or up to $15,500 in 2015 for those over age 50. The maximum is adjusted every year by the IRS.

Lisa Gage, with McKillip Seeds in Wabash, Indiana, says their farm uses a Simple IRA for their 17 employees because it offers a great tax benefit for both the employer and employee and it is easy to administer. "We use QuickBooks and it automatically deducts it, reports it and we write a check once a month to the employee's IRA account at Edward D. Jones. The investment adviser comes out once a year to explain the accounts and how our employees can allocate their investments," said Gage.

SEP and Simple IRA contributions are tax deductible and not subject to FICA or self-employment tax. The investment grows tax-free in the IRA and is only subject to tax upon withdrawal. There is a 10% penalty for withdrawals before age 59 1/2.

Steve Callahan, CPA with KCoe Isom in Salina, Kansas, gave this example: "Let's say an employee makes $30,000 per year and invests $900 in a Simple IRA, you contribute a $900 match. If, instead, you paid a year-end $900 cash bonus, it would cost you $969 including taxes." (After 25 years at 7% annual return, that $900 would be worth nearly $4,900 in the IRA.)

"It's the employee's money once it hits the IRA," Callahan said. "They can decide where to invest it, and they can be as conservative or aggressive as they like. As an employer, you don't need to worry about investment performance because you don't have a fiduciary responsibility as with a 401(k)."

Simple IRAs have slightly different requirements. The employee needs to have earned at least $5,000 per year and most plans are set up so that the Simple IRA begins after two years of employment.

"We set ours up to begin after two years of employment," said Gage. "But if we had to do it all over again, we would start it after 90 days. It would be more of a draw for new employees to have it begin sooner."

Many farmers see the farm as their retirement plan," Duda added. "But having flexibility in retirement by drawing income from a retirement plan, as well as from Social Security, can reduce some of the financial burden from the next generation taking over the farm." And for non-owner employees, a retirement account started early in their career can add up to an appreciated, more comfortable retirement.

(DTN Executive Editor Marcia Zarley Taylor contributed to this story.)


Editor's Note: In this occasional series, DTN details how to recruit and retain a talented farm labor pool. Read past installments at…


Elizabeth Williams