Saving for a Rainy Day

By Dave Owens

Fifty years ago retirement plan options were few and far

between — if you didn’t work for a large company, the odds were you didn’t have

a retirement plan. Recent tax law changes have opened up numerous options for

small business owners and their employees. With today’s opportunities there is

no reason every small business can’t have a retirement plan.

Why would a small business want to offer retirement benefits

to their employees? There are several reasons, but the main ones include

reduction in the owner’s business and personal taxes, reduction in the

employees’ income taxes, and tax deferred growth of invested funds. And,

there’s an added bonus for employers — good benefits, such as retirement plans,

help to attract and retain good employees. That’s something worth considering

in Southwest Florida’s tight job market.

Before selecting a type of plan ask yourself the following

questions:

• What are my priorities?

• Do my employees want to contribute more than 15 percent of

their income, thus maximizing my tax savings?

• Do I want to retain key employees by matching a part of

their contributions?

• Do I want to minimize accountant, lawyer, and

administrator fees by having either the employees or the business pay the plan

costs? With some new plans (SIMPLE or SEP IRA), plan costs are usually minimal

and paid through the investments you choose.

Then, the final question to ask yourself is, “Where do I

start?”

Listed below are the most common retirement plan options.

Keep in mind that everyone’s situation is unique, and the best plan will vary

depending upon your needs.

Simplified Employee Pension Plan (SEP IRA): If you

have just a few employees and are looking for a plan that is low cost and low

maintenance, consider a SEP IRA. The plan is funded with tax-deductible

employer contributions, and you must cover all eligible employees. Employee

contributions are not allowed. There are no annual reports to file with an SEP

and contributions can vary each year. So if business is slow, you aren’t locked

in.

Savings Incentive Match Plan for Employees (SIMPLE IRA):

SIMPLE IRAs are probably the easiest plan to implement and currently the most

popular. SIMPLE IRAs allow employee contributions, but the employer must match

a small percentage of the employee’s wages. Annual contributions are limited to

$6,000 plus up to 3 percent of the employee’s salary. The bonus to employers is

that there is very little administrative work and virtually no cost.

Profit Sharing/Money Purchase Plans: The biggest

difference between a money purchase plan and a profit sharing plan is that with

a profit sharing plan, contributions can vary from year to year, while with a

money purchase plan, contributions are fixed. If you’re not sure about your

company’s financial future, a profit sharing plan is obviously a safer choice.

But as a sort of compromise, some companies offer a combination of the two,

called a paired plan. This way employees know that they will be getting

something every year, but if the business has a particularly good year, then

they could get a whole lot more. A money purchase plan also has higher

contribution limits, so a paired plan allows you to put away more than just a

profit sharing plan.

401(k): This type of plan used to be the most

popular. However, high administrative costs started to discourage small

businesses from implementing these plans. Usually the cut-off for determining

whether or not you should implement a 401(k) is approximately 25 employees. If

you have more than 25 employees, the cost benefit of implementing a 401(k)

becomes more reasonable. In the last couple of years, competition has driven

administration costs down. Currently, a 401(k) can be set up for a flat annual

fee (approximately $1,500 to $2,000) plus a set fee per employee (approximately

$30 per employee). The annual employee contribution is $10,500 for the year

2000 and the employer determines the company match.

Developing a successful retirement plan involves careful

consideration of a wide range of issues and potential problems. Because of the

complexity of today’s plans and investment options, be sure to seek out the

advice of a professional advisor. While many entrepreneurs are extremely savvy

when choosing investments, business owners are also responsible to their

employees for, not only choosing the right plan, but also for choosing the

right investment options.

Dave Owens is a CPA and owner of Island Financial Services

an accounting firm located on Sanibel.