Small businesses; it's time to step up to the plate!
Health plans out-number retirement plans almost 4 to 1.

By: Anthony C. Gruber, CPA, CVA

I was browsing the IRS web-site over Christmas vacation (it's what I do!), and I read some alarming statistics regarding qualified plans:

In 2006, there were 2.5 million Health Insurance plans in the United States. IE: 2.5 million companies have a group health insurance plan for their employees. This is good, but from what I hear, there are still millions without health insurance, so there is more to do. But what really alarmed me was the number of retirement plans that exist in America.  Can you guess how many retirement plans there were in 2006?

700,000. In 2006, there were only 700,000 company sponsored retirement plans in the US!  More than 70% of companies that provide group Health Insurance don’t provide a retirement plan for their employees. If this trend continues, there’s only one inevitable and alarming outcome that will result: Most Americans will not be preparing for retirement:

• The only tax-deductible retirement vehicle available, other than a company sponsored plan, is an IRA. The limit on IRAs, though rising, makes them an inadequate retirement planning option.  An after-tax retirement plan is good for those who can afford it, but most Americans need the tax savings now, so they can afford to defer enough for later.
• Social Security is also not a valid retirement option, and it was never meant to be a retirement option. Social Security was intended to be a supplement. Nothing more.
• Everyone with an income should be saving something for a time when they are no longer able (or willing) to work. As you make plans for retirement, it would be advisable to assume that Social Security is not going to be there. If SS is available when you retire, consider it a pleasant surprise.

A company sponsored retirement plan is just as important as Health Insurance coverage - perhaps more so. If a majority of Americans rely on the Social Security system alone, the system will fail - This fact should be obvious, so I won't spend time explaining it. With objective research, you will draw the same conclusion.

A retirement plan doesn't have to be a big company expense:
If you can't afford to offer a 401k plan, then consider offering a SIMPLE retirement plan. Here is one way to structure a SIMPLE plan so it minimizes cost and targets your benefit dollars strategically:

·         Opt to offer a 3% match. You must choose between a 3% match or a 2% contribution for all eligible employees. If you choose the 3% match, you are only paying money for employees who choose to participate. Also, you have an option to lower the 3% match to 1% for up to 2 years in a row. So if things get really tight for the company, you have this option to pull back company expenses to almost nothing.

·         Let the participants pay for the plan administration expenses. SIMPLE plans are very inexpensive to manage because there are very few testing requirements, and no annual 5500 filing requirement.

·         Restrict access to the plan if you like. You can make Employees wait up to 2 years to join a SIMPLE plan. You can also let them join immediately.

·         Officers can participate in this plan with no fear of anti-discrimination testing. As long you follow the rules, the SIMPLE plan functions like a Safe Harbor plan.

An employee making $50,000 could have deferred as much as $12,000 in 2006 - $10,500 in withholdings and $1,500 in matching funds. If the company is passing administrative costs to the employees, each employee should expect to pay about $75 per year plus 1/2% to 3/4% of total assets to the administrator - Perhaps less. Under this cost structure, an employee with $100,000 in his retirement account would pay about $825 in administration fees. Most 401k participants pay more than this, though many are not aware of it.

A company (with $300,000 in annual payroll) might pay $6,000 in benefits for a plan like this - probably less. And these benefit dollars are targeted to employees who perceive its value:

·         Assume each employee makes $50,000; that 4 of them participate, and the 4 participants contribute $10,500 per year.
The company would give each participant a match of $1,500 each year (1,500 * 4 = $6,000).
The match can be funded after the end of the year, or each pay period.

·         Employees who are not interested in retirement (and who wouldn't appreciate the benefit) won't cost the company anything under this plan: Company contributions are in the form of a match so, if an employee doesn't invest their own money in the plan, they won't get a benefit. I have seen many poorly structured 401k plans that provide $1,000's in benefits to employees who don't care; just so the Officers can participate in the plan. This SIMPLE plan structure doesn't allow that to happen.

·         If $6,000 sounds like a lot of money, keep in mind this represents less than 2% of total payroll costs. Total annual payroll costs for a company this size would be about $330,000 - $300,000 for salaries, and 30,000 for Employer Payroll Taxes (FICA, Medicare, Workers' Comp. Insurance, State Unemployment, and Federal Unemployment).

Retirement plans don't have to be expensive. Companies can offer great benefits for very little money, as illustrated in this example.  Consider contacting an administrator to find out what options are available for you and your employees.  If your Company located in Central Ohio or Tampa, feel free to contact 401ktest.com for help setting up a plan that achieves your objectives.

CPEcredit.com offers a series of courses to help you become more familiar with 401k plan concepts such as management, administration, testing, and 401k terminology and acronyms.  Please refer to their web-site if you would like to learn more about this subject.