Retirement plans were confusing even before the market’s downturn depleted many Americans’ 401(k) plans. Choosing the right qualified plan may be one of the most important decisions you make in your working life.
“Like everybody else, business owners come to a point where they are either unwilling or unable to work as hard as they did at their peak,” says Bill Coffey, senior pension consultant with Peachtree Planning Corp. “Making provisions for that eventuality during a business’s profitable years is part of the life cycle that begins with acquiring the skills to create that business.”
Smart Business learned more from Coffey about how a properly structured qualified plan can become a strong foundation for you and your employees’ retirement.
Why should business owners consider qualified plans?
Starting in the 1980s, defined benefit plans, which provide a monthly benefit at retirement, were decreasing in use due to a combination of poor tax law and corporate cost-cutting as the work force aged and funding became prohibitive. Defined benefit plans were replaced by salary deferral plans with investment decisions made directly by plan participants, often with little input from knowledgeable advisers.
While almost everyone has been affected at the end of a decade during which the markets made negligible returns, those with successful businesses face the most dramatic drop in income upon retirement. To provide a lifetime income of $1,000 per month at age 65 currently costs $138,000.
A positive is that allowable contributions to qualified plans, including defined benefit plans, have increased dramatically throughout the decade. The available increased benefits and contributions make these plans very desirable from a tax viewpoint.
What are some advantages of qualified plans?
The tax incentives that allow current deductibility of contributions and tax deferral on any earnings of retirement funds result in greater accumulations than could be achieved otherwise. Another important aspect is the fact that retirement plans in general cannot be attached by creditors. High-quality prospective employees will also want to see a qualified plan among the benefits offered by an employer.
What do business owners need to do to ensure that their plans are in compliance with the IRS code and ERISA?
They need to realize that a qualified plan is not an investment vehicle. It is a trust to hold assets allocated for the retirement of employees of the business, including the owner. If you start there and get the structure right by establishing a plan with individuals with expertise in the field, then you will be on the right track. The accountants should work in unison with the plan providers to make sure the plan is set up properly and that all filings are made in a timely manner.