Money Management - November 2007

401Ks

The Best Plan For Your Business?

by Steven Budin

Do you think you are paying too much in taxes? Finding it hard to attract and retain quality employees? Establishing a retirement plan for your business could be the solution. Most business owners are familiar with the 401k plan. But is it the best plan for your business? There are a myriad of qualified plans that business owners can establish. The challenge is finding the plan that best suits your business. Alphabet-soup names such as SEPs, SIMPLEs, PSPs, 401ks and DBs are all possible choices.

Here are a few factors to consider which plan is right for you.

Employee Eligibility: Each plan has different requirements regarding employee tenure and income to become eligible for participation. Some plans require one year of employment, others two years and some even require three years.

Number of Employees: Some retirement plans require the business owner to make contributions for employees while others do not. The level of employee turnover is a key consideration. In addition, it is possible to establish a plan that rewards certain employees, but not others.

Contribution Limits: Each retirement plan has a different funding limit. Keep in mind that most plans have maximum limits, but you could always fund a smaller amount.

Flexibility: Whether or not you own a business where profits have large yearly fluctuations will impact the type of plan you chose. Some plans require a yearly minimum funding, but most plans give the business owner a flexible contribution program.

Vesting: Vesting refers to the time an employee must remain employed before he/she is entitled to any employer contributions into his/her retirement account. Also known as “golden handcuffs,” it is an incentive for an employee to stay with the company. Some plans require immediate vesting while others do not.

Administrative Costs: Some plans have zero costs, while others have larger costs. Many of the plans have rules associated with them. Therefore, it is necessary to occasionally test the plans to make sure that they are in compliance with federal regulation. As a rule of thumb, the more detailed your plan, the higher the administrative costs because more testing is involved. Always keep in mind that the administrative costs are tax-deductible, and might even pay for themselves if the business owner gets a large enough tax-deductible contribution into his/her investment account.

Access to Assets:  Some plans allow withdrawals while some do not. Other plans allow one to borrow against the plan’s assets.

Plan Set-Up Deadlines: Depending on the plan, the deadline for establishing a plan could be the company’s tax filing deadline, December 31 or October 1.

When establishing a plan, balance must be struck between maximizing the business owner benefits while addressing the employee issues facing the business. For example, if high employee turnover is a problem with your business, a plan that has a vesting schedule attached to it with a one-year eligibility requirement could work. If the business has a few long-term employees, and the owner wants to reward their service, a plan that gives the employees a share of the profits could be established. If the business has no employees, a plan allowing the maximum possible contribution could be considered.

The government gives business owners a large incentive to establish and fund a retirement plan. If you do not have a plan, you could be losing valuable employees and might be paying more in taxes than necessary. As you can see, many factors should be considered when establishing a retirement plan. Since every plan has advantages and disadvantages, seeking the advice of a qualified professional can help you explore your options.

Steven Budin
Steven Budin is a Las Vegas-based financial advisor and president of The Budin Group.