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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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Owner’s spouse 53 20 52,000 29,357
Employee 1 38 8 36,000 5,388
Employee 2 25 3 20,000 1,208
Employee 3 42 4 36,000 5,543
Employee 4 31 3 32,000 2,891
Employee 5 41 7 28,000 4,636
Employee 6 29 5 26,000 2,049
Employee 7 35 2 21,000 2,280
Employee 8 44 10 48,000 10,215
Total 499,000 200,000
66
What Are the Options?
of 100 percent of pay up to $140,000 per year (see Tables 6.18 and 6.19 on page 65).
Defined Benefit Plan Funding Requirements
The funding requirements for DB plans are complex. Minimum funding standards are required to ensure that the funds will be there to pay the benefits promised. Compliance is a complex and costly annual process. It is critical for your company to maintain a cash flow that can handle the annual financial commitment. Waiver of the annual financial payment for hardship reasons is possible but difficult to obtain (see Table 6.20).
Is One of These Qualified Plans the Right Fit for Your Company?
401(k)
• Uses employee funds
• High cost of administration, compliance
• Internet options
Table 6.20 Highlights of Defined Benefit Plan
Pros Cons
Fixed benefit established High annual commitment
Great catch-up for older owner Highly complex calculations
Rewards long service employees Discrimination tests
Vesting Cost of administration
Forfeitures reallocated to plan Risks of underfunding
Compliance and tax reporting
Fiduciary responsibility
Part 2—More Complicated and Costly Plans
67
Defined Contribution—Profit Sharing
• Flexible contributions, can skip a year
• Allocations based on age, salary
Defined Benefit—Pension (Fixed Payout)
• Great catch-up for older employees
• Complex calculations, costly to administer
• Fixed annual financial commitment
Discrimination Tests of Qualified Plans
In considering a qualified plan, remember the discrimination tests. To qualify for a tax deduction, you must show that your plan does not discriminate in favor of highly compensated employees (usually the owner and key employees). Highly compensated employees are defined as owners of 5 percent or more of the company, are in the top-paid group (the top 20 percent of employees), or receive annual compensation of $85,000 or more. (This amount is indexed as 50 percent of the maximum defined benefit limit, which was $170,000 in 2000.)
Highlights of the Nondiscrimination Tests
• Percentage test. At least 70 percent of all NON-highly-compensated employees must benefit from the plan.
• Ratio test. The ratio of NON-highly-compensated employees to highly compensated employees must be at least 70 percent.
• Average benefits test. It considers the economic value of all benefits and is extremely complicated.
A qualified plan requires compliance with the discrimination tests. If you really want to pick and choose which
68
What Are the Options?
Table 6.21 Options Framework by Complexity and Cost of Administration
Easy/Inexpensive More Complicated/Costly Complex/Expensive
Bonus Defined contribution Stock options
SEP 401(k) Nonqualified plans
SIMPLE Defined benefit ESOP
employees will benefit, then a nonqualified plan may be a better choice. Nonqualified plans allow you many choices including shared ownership with employees. Nonqualified plans are not eligible for current tax deductions and are the most complex and expensive to administer (see Table 6.21).
PART 3—COMPLEX AND EXPENSIVE PLANS
This section describes the complex and expensive-to-administer choices for deferred, incentive compensation, and retirement plans for small business (see Table 6.22).
Stock Options—Do They Make Sense for a Small Business?
Stock options are a way of creating an employee incentive program. Stock options grant the right to purchase stock in
Table 6.22 Complexity and Cost of Administration
Easy/Inexpensive More Complicated/Costly Complex/Expensive
Bonus Defined contribution Stock options
SEP 401(k) Nonqualified Plans
SIMPLE Defined benefit ESOP
Part 3—Complex and Expensive Plans
69
Avoiding Common Mistakes in Retirement Plans
Paul J. Brennan is president of Boston Benefits Consulting, located in Concord, Massachusetts. An actuary by training, Paul performs the complex calculations required to analyze different retirement plan options as well as the actuarial analysis to ensure compliance with ERISA and the Tax Code.
In Paul’s experience, business owners considering retirement plans fall into two basic categories: (1) Those who want a retirement plan but cannot afford costly setup and administrative fees; and (2) those who are willing to spend several thousand dollars for up-front design and annual administrative costs. There are pitfalls in both categories:
1. Business owners using low-cost “off-the-shelf” plans
SEP or SIMPLE plans can be a good choice, depending on the employee situation. A 401(k) plan can be expensive to administer. Internet-based 401(k) plans are providing more cost-effective options for employers willing to do everything online with little support.
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