Don't be shy about retiring: Plan
Unless you plan to work at the helm of your small
business until you die, it's imperative to consider retirement strategies.
A retirement plan not only secures your own
future and that of your employees, but also it's one of the best
tax strategies around -- federal and usually state income taxes
are deferred on the initial deposits and interest grows tax-free.
Plus, employees are coming to expect to have a retirement savings
plan available to them. A study in 1998 conducted by the Profit
Sharing/401(k) Council of America showed that almost 96 percent
of companies with more than 500 employees offer them.
Ask yourself some questions
Dave Evans, vice president of retirement financial planning for
Insurance Agents of America, recommends that employers approach
retirement planning decisions by first answering the following questions.
Your responses will help determine which plan is best for you and
- What's your goal in developing a retirement
plan? Are you trying to recruit and keep employees or are you
primarily interested in improving your own retirement situation?
- What are the demographics of the organization?
Younger and low-paid employees may not appreciate tax savings
because they don't have much disposable income. But older and
more highly compensated employees are likely to embrace the plan
enthusiastically. It can serve as a pair of golden handcuffs to
keep them on the payroll.
- As an owner, what is your situation? Do
you have children to educate? Is your spouse covered by a retirement
plan someplace else? How much income would you like to shelter?
- As a percentage of payroll, how much do
you want to spend in total?
With the answers to those questions in hand,
Evans suggests approaching your accountant, your financial planner
or one of increasing number of companies that create retirement
plans for small business. Find the plan that will best meet your
Christine D. Chaia, director of corporate marketing
Life Insurance Co., says her company is increasingly
called upon to set up retirement plans for small companies. A big
concern put forth by many potential customers is the cost of providing
this benefit. Chaia insists that shouldn't be a big problem.
She estimates that a company with fewer than
50 employees will pay between $1,000 and $2,000 to set up the typical
401(k) plan that her company provides to more than 85 percent of
its customers. Annual maintenance fees, which can be passed along
to the participants, are an additional $15 to $20 per enrollee.
"Setting up a retirement plan costs less than the company picnic,"
Richard L. Sorrell, director of pension services
for Rea and Associates, certified public accountants based in New
Philadelphia, Ohio, administers 65 retirement programs. His largest
client has 85 employees; many are much smaller.
SIMPLEs and SEPs
While Sorrell can help a small business devise a variety of retirement
plans, he believes that for most small-business owners, the two
best possibilities are the Savings Incentive Match Plans for Employees
(SIMPLE) IRA, or 401(k); or the low-cost, low-maintenance Simplified
Employee Pension (SEP) plans.
While both of these plans require employer
contributions, Sorrell says they aren't as expensive as they might
seem at first blush. In the case of the SIMPLE plans, the employee
doesn't have to participate if he or she doesn't want to and that
will lower any matching costs.
Here are the best features of each:
A SIMPLE 401(k) or IRA is only available to
companies with fewer than 100 employees. Funding comes from employees
voluntarily deferring salary. To avoid all the expense and paperwork
associated with regular 401(k) plans as well as caps on his or her
own contributions, an employer must match employee contributions
dollar-for-dollar up to 3 percent of compensation, but only for
eligible employees who voluntarily choose to participate. There's
no match for those who don't want to be in the plan. Or the employer
can choose to contribute 2 percent of the salary of all eligible
employees whether they want to be in the plan or not.
The employer gets some flexibility in deciding
who's eligible to participate and who's not. Part-time employees
and those younger than 21, or anyone with less than one year's service,
can be excluded.
Sorrell likes these plans for a variety of reasons, including the
ease of management. There isn't a lot of government-required paperwork,
so the annual management fees involved are minimal. Plus, SIMPLE
plans can allow well-paid owners to shelter as much as $18,000 a
year, although it takes some creative financial finagling.
The owner who pays himself at least $200,000
puts in $6,000 of his own income and a $6,000 company match and
then "pays" his spouse $6,000 for some business contribution. That
entire $6,000 can also be added to the family SIMPLE, plus a 3 percent
employer contribution, bringing the total deferred to a little more
Sorrell also believe SEPs have some virtues.
SEPs are basically IRAs, but employee contributions to a SEP aren't
allowed. An employer contributes toward his or her own retirement
and that of his or her employees. The minimum contribution made
on behalf of an employee is 3 percent.
When SEPs work best
If yours is a very small company -- one person only or a professional
firm where everybody is well paid -- a SEP may work best for you.
The company can choose to contribute the maximum 15 percent or $30,000
-- whichever is less -- for each employee earning $200,000 or more,
a deal that shelters a healthy chunk of income even for highly compensated
As a single owner/employee, your maximum contribution
works out to be 13.0435 percent of net self-employment income up
to a maximum of $200,000. Net self-employment income is defined
as self-employment income less expenses and 50 percent of the self-employment
If you're looking at these numbers and wondering
whether you can manage to be this generous with employees, Evans
says to consider that the government allows you to make a decision
on whether to participate in a SEP plan after you've assessed your
situation. In other words, you can decide whether to fund a SEP
Year 2000 retirement plan as late as December 2000. This is also
true of some profit-sharing 401(k) plans.
Evans recommends that you think of it this
way. If, in a good year, you normally offer employees an end-of-the-year
turkey and $1,000 bonus, this year give them each $1,000 for their
retirement accounts. "In a smaller business, there is a kinship
and commonality of effort. People understand if the business is
doing well. It makes sense to say, 'We had a good year, we're going
to invest in your future,' " Evans says.
L. Phipps is a contributing editor based in Michigan
If you'd like to make a comment on this story,
-- Posted: Aug. 21, 2000