You have built a successful company or practice from scratch, busy 12 hours a day with endless details. You’ve bought a house and gotten your kids off to a good start.
But somehow, in the rush of daily life, you’ve put off planning for your retirement and helping your employees plan for theirs.
Fortunately, it’s never too late, says Eric Suhr, principal in Pathway Retirement Resources (email@example.com), a third-party pension administrator with offices in Somerset and Mahwah. Suhr speaks on “Retirement Plans for Small Business” at a meeting of the Somerset County Business Partnership on Thursday, September 27, at 8:30 a.m. at the partnership’s offices at 360 Grove Street, Bridgewater. Free for members, $30 for others. Pre-register at 908-218-4300.
There are a number of retirement plan options for small business owners, each with benefits and drawbacks, but whatever the choice, the goal is always the same.
“In a large corporation, it’s all about the employees,” says Suhr. “But in a small business, first and foremost, it’s a tax shelter and retirement plan designed around the owner to maximize his benefit. If it doesn’t work for the owner, it’s not going to work.” That’s not to say, Suhr adds, that employees don’t benefit as well.
“Who wouldn’t be thrilled to have six, seven, or eight percent of his salary put into a retirement plan?” says Suhr. “It’s a win for everybody.”
Suhr, a 1982 Rider graduate, has been building and administering retirement plans for most of his career. After a brief stint with Merrill Lynch in Manhattan, he “loaded up the station wagon and drove to California on a whim.” There he took a job with a financial services firm that wanted to market 401(k)s. While he left the West Coast in 1990 to be closer to family, Suhr, whose wife, Debbie, is a managed care executive at Lab Corp., has stayed with retirement plans.
He opened his own business in 2009 with a friend, Larry Newhouse, who has deep expertise in retirement plans, and, says Suhr, is particularly knowledgeable about the myriad IRS rules and reporting requirements under which they must be run.
The pair now have 80 clients and deal with a range of business owners — everyone from the individual going out on his own for the first time to the business owner with several hundred employees and a retirement plan that is no longer working. But the most common scenario at his firm, he says, involves a profitable company with between three and 50 employees whose owner is ready to start a serious retirement plan.
“They’re profitable, they have excess cash, and they want to shelter it from taxes,” is the number one reason, says Suhr. Business owners also may come in after they have acquired another company or landed a big contract. In fields where there is competition for the best employees, business owners may want a retirement plan in place as a benefit that will help with recruiting.
Or it may just be that a business owner wants to make sure that his employees are taken care of.
“We have a situation right now,” says Suhr, “where a business owner is telling us ‘I have people who have been with me for 18-20 years. They helped build this company, but they’ve never had a retirement plan. I have to do something for these people.’”
Before Suhr can put the right plan in place to accomplish any of these goals, he needs to know a few things about the business. In his first meeting, which he offers at no cost, he wants to know about the company’s cash flow and something about the owner’s long-range plans for his business.
He also needs to know how many employees are involved and their ages. He runs the numbers and comes up with a plan design, also at no cost. When all is said and done, the most popular choice is a 401(k), often with a profit-sharing component. But there are better options for some business owners. Here’s a rundown:
SIMPLE. This plan’s name pretty much says it all. “The SIMPLE is very inexpensive to create and administer,” says Suhr. It could be just the thing for a newly minted entrepreneur or a young dentist just starting out with a handful of employees. Everyone can contribute up to $11,500 a year, or $14,000 for those over 50. The employer can contribute up to 3 percent of income for every employee and can reduce or eliminate the contribution in any two years in each five-year period.
“It’s good for someone who wants to offer some benefit, to stick his toe in the water,” says Suhr. The main drawback for the owner is the limited amount he is allowed to contribute.
SEP. You don’t see the SEP that often, says Suhr, but it has it place. Like the SIMPLE, it is a snap to set up. “Just print out a form from the Internet,” he says. The business owner can put in up to 25 percent of his income, which is appealing. But, says Suhr, he has to put in the same percentage for every employee and “that gets very expensive.” A good possibility for solo practitioners, it can also work for a time for a new entrepreneur with employees because they don’t have to be enrolled until they have been with the company for three years.
“Sometimes a new company will establish a SEP, wait for the third year, and then set up a 401(k),” says Suhr.
Defined Benefit Plan. “We see this with professional practitioners within sight of retirement,” says Suhr. They have paid for their houses and cars, sent their kids through college, but have not saved for retirement and need “to play catch up.”
This can be a good plan, says Suhr, if the self-employed professional says, “I’ve got to put a lot away right away.’”
In a defined benefit plan, the business owner decides how much money he needs to accumulate for retirement. Then a formula takes his current age and his projected life span as determined by actuarial tables and determines how much he will need to save each year to reach that goal within a specified length of time. A big plus for the catch-up player is that he can put in 20 to 50 percent of his salary, up to a total of $100,000 a year. This is twice the total maximum allowed in a 401(k).
While building a retirement fund fast, the business owner, says Suhr, “can save $30,000, $40,000 a year in taxes.”
The downside is that the same formula has to be used for his employees. So, if employees are also close to retirement age, the cost could be prohibitive. But if employees are very young, it could well be affordable, as their much longer projected working life would equal far lower contributions.
401(k). The big favorite among retirement plans, the 401(k) is the choice of 80 percent of Suhr’s clients, and is the plan that he and his partner have chosen for themselves. Under a 401(k), the business owner and the employees can each contribute a percentage of income up to $17,000 a year. The employer can provide matches for employees’ contributions and can also add profit sharing to the plan.
The profit sharing component allows the owner to raise his yearly contribution to the 401(k) to a total of $50,000. But if he makes profit sharing contributions for himself, he must also provide profit sharing for his employees. He can, however, do so using an age-based formula. Younger employees, having more years in which to accumulate retirement savings, could receive a lower profit-sharing amount than older employees — or an older owner.
“It’s typical in a small business to have an older owner — maybe 45 or 55 — and younger employees,” says Suhr. So, a 401(k) could let the owner put away a good amount for retirement without taking on the burden of making similarly large payments to employees’ accounts. Profit sharing is generally calculated at the end of the tax year, allowing the owner to move contributions up or down depending on each year’s results.
401(k) plans are open to business of all sizes, and even to sole practitioners. This comes as a surprise to many professionals, says Suhr, citing the common misconception that they are reserved for large companies.
Another common misconception is that a 401(k), or other tax-sheltered retirement savings plan, can be used to shield a windfall from taxes. Clients sometimes hope to use a plan largely to obtain a tax benefit for a large one-time contract or payment of some kind, but, says Suhr, the IRS will notice and will not be happy.
Similarly, the IRS likes to see consistency. If an employer with a 401(k) decides, for example, to go with a 5 percent match, he should be prepared to continue that match for at least three years if at all possible. Still, “the IRS isn’t completely heartless,” says Suhr. The agency understands, he says, that “things happen.”
While Suhr, like most of his contemporaries, has a 401(k), this retirement tool is relatively new. When his late father, Fred, retired from a career as a toolmaker in 1986 he had to rely on his IRAs. But he and Suhr’s mother, Doris, a homemaker, did well, saving enough for a good retirement on the Eastern Shore of Maryland.
Small business owners, occupied 24/7 with deadlines and payroll, clients and vendors, will be happy to know, says Suhr, that choosing and setting up the right plan to get them on their way to a full and secure retirement is easy, quick, and inexpensive.