As a small-business owner, one of your goals is to be as productive as possible while minimizing costs. This basically defines efficiency. It is during these tough economic times that cutting expenses becomes increasingly important. While many small-business owners are occupied with expanding their business, some tend to overlook their legal obligations in terms of providing a retirement plan for employees. It is indeed the case that if you promised, in writing, to provide a retirement plan for your employees, and you haven’t changed any of your documents by 12/31/2008, then you must, as both a retirement plan sponsor and de facto fiduciary, provide a plan for your employees. Assuming most small business owners still view having a plan as a mutually beneficial concept, having a cost-effective plan for your employees is a great way to control the employer-employee relationship, which consequently fosters an enhanced workstation atmosphere. In the end, many employers end up paying onerous fees (upon review of the retirement plans for many small-businesses, The Rogers Company found that many people are paying up to 375 basis points when they should be paying around 110-120 basis points*) and have outdated paper work (regulatory requirements have changed drastically since the inception of the original retirement strategies). Small-business owners are often ignorant or not cognizant of their retirement plan options. Thankfully, I am here to detail them for you.
First and foremost, it is pivotal to review your current employee investment platform. Start by distinguishing your actual costs related to your retirement plan and grab a few proposals to see how much money you could be saving on an annual basis. This process is particularly important because of the potential increase in personal income and capital gains taxes at the beginning of 2011. A retirement plan’s tax sheltering potential is the reason why the employer should scrutinize their current retirement plan so closely; any adjustments could potentially cut costs tremendously.
Know Your Options
The Simple IRA applies to employers with under 100 employees. In this scenario, employees decide for themselves how much money they want to deposit into their IRA account. Employers can contribute as well to an employee’s account on a consistent percent-of-compensation basis. This way, the IRA custodian presents the only expenses for the employer (and these expenses are usually nominal). However, the downside of this method of retirement investing is the low ceiling on annual contributions. While under a standard 401(k) the maximum for annual contributions is $16,500 and $22,000 for anyone over 50, the maximum under the Simple IRA is $11,500 and $14,000 respectively. If you can, as a business-owner, afford to put away a significantly higher percentage of your income towards retirement, you can consider a nonqualified deferred compensation plan. You can contribute to this plan with after-tax money (the plan itself is not tax-sheltering), and once you retire you can take out the money tax-free.
Safe Harbor Plans
A Safe Harbor Plan provides a beneficial means to tune up an existing 401(k) plan that an employer provides. This specific plan allows the employer to defer the statutory maximum (the maximum contribution to a retirement account in a given year) and by design, the safe harbor plan precludes the need for a numeric anti-discriminatory test (tests for evenhandedness in the amount contributed to retirement by the highly compensated workers versus all other workers).
When an employer chooses to administer a safe harbor plan, they have two routes to select from. In the first option, the employer is obligated to contribute 3% to the 401(k) regardless of how much the employee decides to add from their own taxable income towards the tax-sheltered plan. The second alternative creates a condition where the employer has to fully match any employee contributions for the first 3%, and half match any contributions for the following 2% in employee contributions. Therefore, an employee who chooses to contribute 5% towards retirement will attain an additional 4% in matching contributions from the employer. While the first formula mandates the employer to consistently contribute 3% towards the employee’s retirement account, the second formula the employer’s expenses are dependent upon how much money the employee wants to contribute. The safe harbor plan helps fosters an amicable employer-employee relationship because it puts control in the employees hand. They independently elect how much they contribute, and in some cases can obtain a relatively high matching contribution from the employer.
Social Security Integration
In a Social Security Integration plan, the employer has an opportunity to level the playing field for contributions for their employees. This implies that lower-wage employees will receive a higher contribution (by percentage of compensation) than highly compensated employees. When employees receive a more equalized payment method such as social security integration, they tend to remain with the company for longer. Typically, when lower-paid employee is receiving such a high retirement contribution, it would compensate for their lower salaries, thus causing them to remain with the company for longer periods of time.
Profit sharing is a great way to invest in your employee’s retirement because it gives the employee an incentive to work harder and produce more. The idea behind profit sharing is, out of the profit that your small business accumulates, a certain percentage or kickback is dispersed to all the employees in a formalized manner. Essentially, this process, also known as “cross-testing,” would work in a way that those employees who have remained with the company longest and produce the most would receive higher profit sharing contributions, as a percentage of their compensation, than those employees who are new to the business or produce less. This option has a morose future, as Congressman Lloyd Doggett’s “Retirement Fairness Act of 2009” could ban profit sharing plans for 401(k), however, the legislations for this act is still prospective, so the profit sharing endeavor is still legal.
Now that you have your options outlined in front of you, remind yourself how beneficial an effective retirement plan can be to minimizing your costs and improve your efficiency. With the appropriate goals in mind and the right people to guide you, it is possible to expand you business even further.
As always, feel free to call or e-mail with comments and/or questions.
Premier Financial Advisors, Inc.
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *231
*A basis point represents 1/100th of a percent (i.e. 375 basis points = 3.75%)
Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.