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Beyend 401 small buisness owners - Jean D.

Jean.D Beyend 401 small buisness owners - Wiley & sons , 2004. - 274 p.
ISBN 0-471-27268
Download (direct link): beyond401korsmallbusinessowners2004.pdf
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Family Business?
The options for deferred compensation and retirement plans, discussed in Chapter 6, need to be evaluated from the perspective of the mix of family and nonfamily employees in the business. Retirement plans that require employer funding—which small business owners usually view negatively, since they are paying for employees’ retirement—can actually be an upside for family businesses. If most or all of the employees are family members, the business is able to obtain tax deductions (reduce current taxes) to fund the retirement of family members.
If Most Employees Are Family Members
If most or all the employees are family members, a SEP (Simplified Employee Pension Plan) is an easy choice. SEPs are fully funded by the employer up to 25 percent of income to a maximum of $40,000 per year. With SEPs, employers are not locked into an annual funding commitment and decide each year what amount (percentage of compensation) they want to fund (up to the maximum), and they can even skip a year. In funding SEPs, employers cannot discriminate in favor of themselves or highly compensated employees. This can work well for a family business, if you are funding the retirement of family members.
If Key Employees Are Nonfamily Members
If key employees are nonfamily members, the choices are more complicated.
The range of qualified plans (such as the defined contribution, 401(k)s, and defined benefit plans discussed in Chapter 6) offer some good choices but require satisfying the discrimination
Special Considerations in Evaluating Options 45
tests. The discrimination tests apply to all employees, so you cannot favor family members in funding retirement plans.
Nonqualified plans limit coverage to selected key employees. With nonqualified deferred compensation plans, you can put more money away and select the employees who are covered. Nonqualified plans can focus exclusively on the business owner and/or key employees (and exclude most other employees). Nonqualified plans can be implemented in addition to qualified plans.
Forfeiture provisions of nonqualified plans are an effective way to retain key employees. Forfeiture provisions also mean the employer does not have to pay employees who leave the company.
Avoiding Older Generation’s Dependence on Younger Generation
It is much easier for the older generation to “let go” if their retirement income stream is secure, separate, and apart from the future performance of the business. That way, their retirement income is not dependent on how well the kids or successor managers run the business. A carefully designed retirement plan can secure a retirement income, apart from the business.
Special considerations apply to the development of compensation and retirement plans for a family business. Recognizing family dynamics and retaining key nonfamily employees are essential factors. Using business planning methodologies and advisors can help to make the planning process more objective and reduce the emotional fallout. Experience confirms that you cannot please everyone and that some family members will not like the plan.
Even though you cannot make everyone happy, it is critical to have a written succession plan. The absence of a plan can
Family Business?
spell disaster for your business. Within the framework of a succession plan, compensation and retirement plans are tools to accomplish your goals.
Owners of family businesses need to carefully analyze the options discussed in Chapter 6. Life insurance, discussed in Chapter 7, can be an important part of your financial security as well as a tool for equalizing interests among family members. Instead of leaving the business in equal shares to your survivors, you can provide for nonworking family members through life insurance and leave the business to the family members who are employees.
Because cost and complexity are major considerations in choosing a retirement plan, it makes sense to look at the options in terms of those criteria. In discussing alternatives, we examine cost and complexity of administration from three perspectives: (1) inexpensive and simple, (2) more costly and complicated, and (3) complex and expensive. This framework will help you evaluate the pros and cons and make a choice that is a good fit for your business (see Table 6.1).
Table 6.1 Options Framework by Complexity and Cost of Administration
Easy/Inexpensive More Complicated/Costly Complex/Expensive
Bonus 401(k) Stock options
SEP Defined contribution Nonqualified plans
SIMPLE Defined benefit ESOP
What Are the Options?
Bonus Program
The easiest and least expensive incentive is a bonus program. You decide each year what you can afford and then pay it out as part of W-2 compensation. There is no annual commitment or complicated administration. There are different ways to calculate and distribute bonuses.
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