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Accountant's Corner There is Nothing Simple About Choosing the Right Retirement Plan By Ronald L. Noll, MS, CPA
First of all, not all of the changes included in the Act are really
intended to simplify things for the individual. The three-year
suspension (1997, 1998, 1999) of the excise tax on excess distributions,
for example, is actually a revenue-raiser for the government.
Although the suspension allows individuals to take out substantial
sums from their plans without incurring the excise tax, it encourages
larger taxable distributions from qualified plans from
1997 through 1999. The suspension is not beneficial for everyone,
and a restaurateur would be wise to consult a professional pension
advising business -- such as Integrated Payroll Pension and Benefits,
Inc. -- to determine whether it might pay to withdraw large sums
during the suspension period.
While the SIMPLE retirement plan can take the form of an IRA (replacing
the SARSEP) or one that follows the old 401K rules, most restaurateurs
would be better off choosing the latter. Even though the IRA
plan costs less than the 401K, you can lose your assets from the
plan if you are sued as an individual subject to creditors' attack.
With the 401K plan, you are paying more at the outset, but assets
are not subject to creditors (just as Social Security assets cannot
be taken from you). There is also an advantage to a 401K type
of plan from the employee's perspective, since employees cannot
borrow from IRA plans, whereas they can borrow from a 401K.
Another aspect of the SIMPLE retirement plan that may not be right
for everyone is a $6,000 indexed cap for SIMPLE plans compared
to the $9,500 indexed cap for traditional 401K plans. Again,
a pension expert can best calculate how much various choices will
cost. Most plans are sold by insurance agents or brokerage firms,
but only specialists in the tax field can determine whether a
plan that seems simple at the outset will prove to be more economical
for your business in the long run.
But whether or not a SIMPLE plan is right for you, you should
be making arrangements to begin some sort of retirement plan for
your full- and even part-time employees if you are not already
providing them with this benefit.
Many restaurant owners have shied away from retirement plans because
of the cost. It's important to note, however, that your financial
outlay is likely to be overshadowed by the loyalty and long-term
employment you incur among your employees by establishing such
a plan for them.
National studies of restaurants have shown that where owners provide
benefits of this nature, employee turnover is far lower than where
no such benefits exist. When you consider the cost in time and
money of training new employees, you begin to realize the kind
of long-term savings that you can accrue for your business. You
are also more likely to attract and retain higher quality employees
by offering retirement benefits, and this will give you a competitive
edge in hiring over other restaurants that offer no such benefits.
A case in point is a regional restaurant chain with more than
40 locations, with each location employing more than 100 people.
After instituting a modest 20 percent matching 401K plan, employee
loyalty and longevity increased substantially. The reduction
in employee turnover was especially crucial during peak seasons
when extra help was needed. The owner says the 401K cost is substantially
less costly than employee turnover costs. That is why it
is important to consider providing retirement benefits to your
part-time as well as full-time employees. It will help to ensure
that a pool of trained, reliable workers will be eager to return
to your restaurant whenever you require extra staff. For restaurateurs
to follow the general advice of benefits planners to exclude part-time
personnel from a plan is counterproductive in an industry that
relies so heavily on part-time employees.
A beneficial tax change for retirement plans that is already in
effect is the bottom-up QNEC, an acronym for Qualified Non-Elective
Contributions. QNEC is based on a calculation that says the owner,
or highly compensated employee (HCE), cannot put in more than
a certain percentage over what a worker, known as a non-highly
compensated employee (non-HCE), can put into a retirement plan.
If an owner makes $100K per year and each employee makes $20K
per year, and all the employees put in five percent, the owner
cannot typically put in over two percent more than their five
percent average.
Bottom-up QNEC allows an HCE to increase non-HCE contributions
through an adjustment bonus in order to increase his own contribution
percentage. Here is how it works. Let's say a very small company
had four employees at $20K per year, who were contributing five
percent and the owner is only allowed to put in seven percent.
Now suppose one of the employees quit after the first week in
January, after he had been paid four hundred dollars, twenty of
which would go into his plan. As a corporation, the owner could
put a hundred dollars into his plan (representing a 25 percent
maximum contribution) as a "going away" gift. One employee
now has 25 percent in the plan, while the other three employees
each have 5 percent. Now, the average for all four employees
is 10 percent, so the HCE could put 10 percent of his $100K into
his plan, protecting an additional three thousand dollars from
income tax for an outlay of only a hundred dollars -- a savings
of $1500 for someone who is most likely in the 50 percent tax
bracket.
The above is just one example of the substantial opportunities
that can benefit small business owners who consult with savvy
tax professionals who understand the nature of the restaurant
business. While restaurateurs are typically very good at cost
analysis with regard to food waste, shrinkage during cooking,
inventory, etc., they are less likely to consider the long-term
ramifications of a retirement plan in terms of maintaining a reliable,
highly skilled staff. One size doesn't fit all, whether you are
talking about prime rib or retirement plans. Be sure to consult
with a tax professional who can tailor information on the pros
and cons of various benefits plans to your business.
For more information on retirement planning through Integrated
Payroll Pensions and Benefits, Inc., call (888) 464-7724.
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