A Simple Retirement Plan For Your business

by Susan Glass-Donelan

As an automotive business owner, you are confronted with the dilemmas of new and returning customers. You are faced with problems from front to rear, mechanical through electrical. Yet, how many of you take the time to consistently fine-tune your own cars? There are probably some nagging problems that have not yet worked their way into your busy schedules. To take that thought one step further, have you taken time to make certain that the problems of your own business are solved and that all is running at peak performance?

As you well know, the method of auto problem-solving is to break all things down to utter simplicity. When fine-tuning your own business to run at peak, tax-advantaged performance for you and your family, simplicity should also be the key. Fortunately, recent changes made in the tax code, and available starting in 1997, make tax-savings and retirement planning more flexible and simpler for you, the small-business owner.

The Small Business Job Protection Act, commonly known for its minimum wage legislation, also houses many changes for various plans from college funding to IRAs. Another piece of legislation passed this summer, the Health Insurance Portability and Accountability Act, creates numerous and welcomed changes for the consumer. One example is the medical savings account from which consumers can draw to pay for their medical costs. In some circumstances, you can draw on your life insurance benefits tax-free to pay for treatment of chronic or terminal illness.

The Simplified Employee Pension (SEP) and the new Savings Incentive Match Plan for Employees (SIMPLE) are the simplest retirement plans available for small businesses. Either plan can be used by any type of business: sole proprietorship, partnership or corporation. SIMPLEs can be used by tax-exempt organizations as well. If you are a small business employer without the time or money for the administration of a pension or a 401(k) plan, then the SEP and SIMPLE are calling you. Simply fill out an uncomplicated form and designate the annual contribution amount to establish either one.

Now suppose you're one of those tax filers who is always late! SEPs would be great for you because you can establish and contribute to them any time prior to the business' tax-filing deadline -- including extensions. It is the only plan that can be started to provide tax benefits for a fiscal year already past; SIMPLEs must be established during the tax year in which the deduction is taken.

Let's compare the traditional IRA to the SEP-IRA, an individual retirement account for the business. The SEP-IRA provides more significant tax advantages than a traditional IRA. Traditional IRAs allow individuals to deduct a maximum of $2,000 annually from their taxable incomes, and earnings on those funds are also tax-deferred. Of note to those businesses that have not begun a qualified pension plan: previously, a married, single-income couple could save only $2,250; starting in 1997, that total is $4,000. However, the existing phase-out rules continue to limit deductible contributions when either or both spouses participate in qualified retirement plans and adjusted gross income exceeds specified amounts depending on filing status.

All SEP-IRA contributions are tax deductible to the business and growth is tax-deferred until withdrawn. An employer SEP-IRA account can accept up to 15 percent of pay with the entire amount being tax deductible as long as the same percentage of pay is contributed to employee IRA accounts. The tax law specified $30,000 as the maximum contribution. However, due to 1994 tax law changes, the maximum salary employers can count for qualified-plan contribution purposes is $150,000.

One of the significant changes making retirement plans more flexible for employers lets a greater number of businesses take advantage of simplified retirement planning by using SIMPLEs. This accommodates employers with 100 employees or fewer; whereas, the Salary Reduction Simplified Employee Pension (SAR-SEP) could only be used by employers with 25 or fewer employees. Like the SAR-SEP, SIMPLE resembles a 401(k) in that it is an employee savings plan. It allows salary deferral of 100 percent compensation up to $6,000. Little administration is necessary, no discrimination tests are required on deferral percentages and no IRS filings are required.

Both SEP-IRAs and SIMPLEs provide businesses with many advantages, but are not suitable for everyone. When choosing the appropriate retirement plan, you should consider many factors:

Many companies prefer the traditional retirement plans because employee-vesting can take up to seven years, while vesting is immediate with the SEP and SIMPLE plans. Also, a SEP cannot exclude part-time employees who are 21 years of age or older; have been with the company any period of three of the last five years; and have earned $400 or more each year, adjusted for inflation.

To qualify for participation in a SIMPLE, an employee must have earned $5,000 or more in at least two of the prior five years. Other retirement plans do not have to include part-time employees, despite their age or how long they've worked for the business. A SEP or SIMPLE can be troublesome if your company employs quite a lot of part-time help.

Though SIMPLEs cannot be established if other retirement plans are being used, SEPs can be combined with other plans, including another SEP. This enables both employers and employees to share in funding a retirement plan. If an employer combines a SEP-IRA with a money purchase plan, for instance, the overall contributions can increase from a 15 percent to a 25 percent limit of compensation. This does require the employer to make at least the 10 percent money purchase contribution annually. The trade-off for this flexibility is that, as other plans are connected with a SEP, the SEP increases in complexity and its administration increases in difficulty.

Regardless of the simple natures of SEPs and SIMPLEs, many of you operate successful businesses without a retirement plan. Thus, you don't take advantage of their significant tax benefits. According to the U.S. Small Business Administration (SBA), greater than 80 percent of businesses with up to 25 employees have no retirement plans. Since employers of this size constitute 80 percent of all businesses, a huge portion of the workforce is left uncovered by retirement plans.

These plans might not be suitable for every business, so evaluate them carefully before choosing one. A SEP or SIMPLE might just be one of the best alternative retirement plans available in a long time to properly suit your purposes.

Susan Glass-Donelan is a certified financial planner in the Dallas/Fort Worth metroplex. Her challenge is to create, protect and preserve net worth for business owners and individual clients.

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AutoInc. Magazine ®, Vol. XLV No. 3, March 1997