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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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Renee says that she sees a couple of common mistakes:
1. Picking the wrong plan in a last-minute rush to reduce
tax liability
Business owners wait until the last minute and act only after their accountant tells them that they made “a lot of money” and owe a large amount in taxes. Acting in haste to reduce their tax liability, business owners pick the wrong plan.
2. Being too generous or too restrictive in their plan
Making employees eligible for plan participation on the first day of employment is an example of a business owner being too generous. The business owner can find him/herself with administrative headaches if employee turnover is high.
On the other extreme, examples of a business owner being too restrictive include delaying eligibility for the plan for
(continued)
162 Tips to Avoid Common Mistakes in Retirement Plans
maximum allowed under the law (two full years) or by refusing to make any matching contribution to the employee plan. Business owners can experience an employee backlash from such actions. By refusing to make any matching contributions, business owners are missing the safe harbors that reduce risk and enable larger contributions for themselves as well as their highly compensated employees.
A plan that functions and works smoothly for a company is the goal.
A SIMPLE plan works well for many small businesses (with 100 employees or less). The business owner can put away $7,000 plus up to three percent of salary to a maximum of $14,000 in 2002. Employees can elect to participate. Employees also elect the amount they wish to contribute up to $7,000 ($7,500 if over age 50) of their pretax pay (in 2002). For participating employees, the business owner matches the employee’s contribution dollar for dollar up to three percent of compensation. The employer match can change from year to year. The employer match can be one percent instead of three percent in two out of five years.
Renee has seen the SIMPLE plan work well for a growing business that is adding employees. Each participant’s account is an IRA and there is little additional work when employees are added to the payroll. A critical issue is what date the employee is eligible to participate in the plan. Some business owners choose to make employees eligible to participate after a probationary period of several months. Others choose an eligibility date of the first anniversary of the date of hire.
Renee has also seen business owners who were unhappy with the SIMPLE plan they put in place in haste because of their extreme reluctance to fund the employer match.
There are restrictions in SIMPLE plans. The good news is that the plans have no nondiscrimination rules. However, the
Tips to Avoid Common Mistakes in Retirement Plans 163
bad news is that business owners selecting a SIMPLE plan cannot have any other qualified retirement plan. In addition, there are severe penalties for a withdrawal before two years in the plan. So, a departing employee cannot simply roll over the IRA, and the business owner can be stuck with the small accounts hanging around for two years.
SEP plans, which are entirely employer funded, can be an excellent choice for a family business in which the employees are all family members.
Renee feels that picking the right plan is just the beginning of an ongoing process. She makes it her practice to schedule regular follow-up consultations, two to four times a year, with the business owner. She also makes herself available to the employees for consultations that can include family members. Retirement planning is not a one-step process. It requires ongoing education and checkups.
164 Tips to Avoid Common Mistakes in Retirement Plans
Avoid Common Mistakes by Managing Risk in Retirement Plans
Robert (Bob) Cormier
Robert (Bob) Cormier is a Certified Financial Manager (CFM) and a Financial Advisor with Merrill Lynch located in Wellesley Hills, Massachusetts and on the Internet at Robert_Cormier@ML.com. Bob has a disciplined approach to financial planning.
Drawing from his military background (he received his BS from the U.S. Military Academy at West Point), Bob emphasizes the importance of having an operations plan before looking at investment choices. In helping business owners achieve their goals, Bob has found that it is more important to focus on managing risk than on “trying to beat the market” with aggressive investment strategies.
“Not shouldering the whole load,” is another strategy that Bob says makes sense for some companies. With this approach, business owners can share the load of funding retirement plans with their employees by having a combination of plans, such as a 401(k) and a profit-sharing plan. The 401(k) plan is funded substantially from employee contributions. A profit-sharing plan allows the employer to share the good times with employees without being locked into contributions that can be difficult to afford in bad times. Other plan choices for business owners include the Simplified Employee Pension (SEP) and the Savings Incentive Match Plan for Employees (SIMPLE). The SEP plans may be preferable for businesses that are new or that have variable profits because the employer can choose whether to make contributions from year to year. SIMPLE plans may be more suitable for businesses with a stable income stream, since employer contributions are mandatory.
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