Best retirement pension plan

[Guest joeyd]

I am an owner of an S Corporation and I am looking for the best pension plan available for myself. I typically have 2 to 4 employees and the SEP contricutions I would have to make for the employees does not seem to make the plan a good idea for me personally. Does anyone have any recommendation on any plan available where I can maximixe my contributions but would minimize fund outlays for employees. Any help is appreciated.

[Belgarath]

This is an impossible question to answer without detailed information on your age, ages of employees, salaries of you and your employees, stability of your earnings and future outlook, etc., and most importantly, what YOU really want/need. I'd suggest, just as a basic source to see a general description of various plan types, IRS publication 560. This will give you enough background to then do a few web searches for more detailed information. Once you have a general idea, then I'd recommend contacting a local Third Party Administrator if you want detailed proposals.

[rcline46]

Determining the best design would require a census of all of your employees, including yourself, total income available for benefits (ie, salary and K-1 income not required for your living expenses), future viability of your business and of course an idea of your risk tolerance.

Many on this board can do an excellent job of designing a plan for your. However, no one wants to give away their hard won knowledge. Without some assurance that you would place your plan(s) with them, a fee may be involved for a study of your unique situation. You can use the email function to contact members privately. You can follow different threads for a while to see if you 'like' one or some people more than another.

Locality may be important to you if you desire 'face' time. If this is so, let us know what region or even more specitic to a city would help.

[wmyer]

You can also go to http://www.selectaretirementplan.org/select.htm which will ask you some basic questions and help you choose a retirement plan that's right for your business. Or you can call some vendors or visit some vendor websites. A lot will depend not only on how much you want to put in, but also how much responsibility you're willing to take...for example, a SEP doesn't require a 5500 form. There are plans out there that can create a large disparity between your contributions and your employees...for example a DB plan, a cross-tested profit sharing plan, a Safe Harbor 401(k). But a lot will depend upon the census data.

[GBurns]

Since you are considering a retirement plan which means that you are considering ways to transfer assets from the Corporation to your personal pocket, it might be a good time to consider whether you should remain an S Corp etc.

While you are looking also look at "Age weighted" and "Cross Tested" plans which might not be in Pub 560.

[AndyH]

Since you are considering a retirement plan which means that you are considering ways to transfer assets from the Corporation to your personal pocket

Mr. Spock might not agree with the logic of this conclusion. Kindly explain or retract.

While you are looking also look at "Age weighted" and "Cross Tested" plans which might not be in Pub 560.

Would the EOE please explain these things?

[david rigby]

You can see IRS Pub.560 here:

http://www.irs.gov/pub/irs-pdf/p560.pdf, or call to have a copy mailed to you.

You can also find resources here:

http://www.dol.gov/ebsa/consumer_info_pension.html

The link in post above by wmyer appears to ignore defined benefit plans as an alternative. Depending on the factors mentioned above (ages, compensation, etc.), a DB plan could be a valid consideration. Don’t be scared off by those who say they are dinosaurs; DB plans have advantages that can be significant in certain situations, but may not be cost effective for all employers.

[GBurns]

Does an S corp allow the same things as a C Corp? Which 1 would serve his future plans better?

If he wanted to save out of his W2 earnings he could just go ahead and do so without needing to set up any plan of any sort. He obviously wants to do more than take it out of his own pocket whether it got there by W2 or K1. There are only 2 sources of money available his money and the Corporation's money that has not yet flowed trhough to him. So if he is not using his own W2 money, What then is he doing but looking for a way to transfer the Corporation money outside of a W2 and/or K1 to himself via some vehicle?

Pub 560 does not address plan designs so he would not be aware of the terms. Why should he be aware? Based on his facts and circumstance including age, employee's ages etc etc such a plan design might fit his needs or at least be considered.

I did not get the point of your questions nor the reference to Mr. Spock. What is the relevance of Mr. Spock and why would/could there be a need for retraction? Retraction of what?

[WDIK]

What is the relevance of Mr. Spock

Perhaps quint was merely expressing his hope that you would "Live long and prosper."

[Guest joeyd]

I am 45 years of age. Our business gross sales varies from $800,000. to $2.5M depending on the success of our construction business. Last year I had appx. $150,000. in employee salaries. Our foreman , 42 years old, made appx 60K, Our subforeman, age 41, made appx 45K and the balance is made upof temporary workers making an average of $15-20 per hour, typical age is 40 years.

My salary / compensation is directly tied to the succes of the business. I am able to draw $300,000. on a good year and $30,000. during a recession.

I'm not trying to get a plan for free, just gathering information to educate myself. I will proceed and pay for someone to start a plan. I just need to educate myself.

I'm looking for the best way to take money directly from the S corp and invest in a retirement plan withour having to take S corp money( My money) and pay for employee contributions. I treat my employees extremely well, I'm not looking for a plan for employees, only for myself.

This is a great site and thanks for all the responses.

[GBurns]

You start by doing the suggested reaearch and a little reading. The research will point you to possibilities for which you should get the literature and read. This will give you sufficient knowledge to better understand that which agents will try and sell you. Do not get hung up on any "proprietary" names, that is just window dressing to make a particular plan seem different from others which under the shell are the same thing.

quint,

See what joeyd says at the start of the 4th paragraph. It wasn't rocket science to have seen this from his 1st post. In fact it is a given. That is what business owners have to do.

What is "EOE"?

[SoCalActuary]

To joeyd: You have expressed the common intent of many business owners, i.e., that the profits are all yours.

The IRS treats pension contributions as a regular business expense deductible against business income before profits are determined. If you have a pension plan, it is not your money yet, because you have not been taxed on it.

Unfortunately for you and your wish, the IRS does not grant the tax deduction if you violate IRS Code 401(a)(4) or 410(b), both of which require that the benefit is not for the exclusive use of the highly compensated. If you want the deduction, you must include some or all of your employees. If that does not work for you, then pension benefits don't either.

[GBurns]

But the trick is to choose the method that gives the maximum legal benefit to the owner even if it turns out the employees must be included, and to what extent. As a result Coporate structure etc should be looked at in case a selected method works better under 1 scenario than under another. It most likely will end up as a decision between paying the IRS or sharing with the employees. However how much of either will be conditioned by the method chosen.

This is a reason why we use "age weighted" and "cross tested" etc rather standard methods.

To understand better joeyd needs to do the research and reading if he wants to "live long and prosper".

[AndyH]

joeyd,

A 401(k) plan sounds like the way you should lean. That way you "may" not have to contribute on behalf of your employees. But you may find it in your interest to do so so that they participate which in turn allows you to mzximize your savings opportunity.

There are sharks in the water so speak to several potential service/investment providers.

[Guest joeyd]

SoCAL, In wish I could consider myself " highly compensated". When the bills, suppliers, IRS, Insuarance, etc.etc.etc. are paid, I am not highly compensated. There are times many business owners wonder if it is worth the headaches. That being said, I am interested in pulling money out for my retirement from the corp. Do not forget,in a small business the corp exists only because of the owners and their efforts. the money in the corp is that of the owners.

Thanks,I needed to vent.

[Blinky the 3-eyed Fish]

Joey, with that sort of logic, I would like to see how far your business gets with only you working for it. The reality is that you are making money on the backs of your employees or you wouldn't have them. I now question how well your employees are treated with that thinking.

[stephen]

joeyd, as a more than 5% owner of a company you are considered highly compensated regarding the qualified plan rules regardless of your actual income.

[SoCalActuary]

When I use the term "highly compensated", it has a legal meaning, not an emotional one. If you own more than 5% of your business, or if you make more than $95,000 the law says you are highly compensated. As a small business owner myself, I am right there with you, but I did not make the rules.

To understand this in an emotional context, what is the most money an IRS agent can make? If you make more, then you must be highly compensated.

[Belgarath]

Joey - when SoCal was referring to "highly compensated" he wasn't necessarily referring to your level of net salary. By statutory definition for purposes of a qualified plan, as the sole owner of a business, you are "highly compensated" - even if you end up with no income. When/if you decide to meet with a local advisor to discuss specifics, they will explain all this to you as it relates to your specific situation. We're all discussing generalities here, as real answers are very fact-specific.

Rule of thumb - you can't have your cake and eat it too - if you want anything substantial for yourself in a qualified plan, you are likely to have to do something for your employees. Your local advisor will be able to show you a design with specific numbers so you can determine whether or not it is worth it to you.

Ok, I see SoCal already replied while I was typing this!

[AndyH]

I'd get that fish for you, but he does have a point. If you had no employees then you could have your own plan, so there is probably a good reason why you have them.

[Guest joeyd]

Blinky, One of my employees went to the dentist prior to the holidays with a severly swollen gum affecting one side of his face. We provide medical but not dental insurance. Turns out because of years of neglect ( he's been thru a bad divorce and his present marital status is poor at best costing him much of his income) the dentist is recommending removing 60-80% of his upper teeth. The dentist happens to be a client where we have recently replaced all millwork, ceilings, trims etc. in his office. My final billing of appx. $2,000. was agreed to be donated for my employee's dental work. It will probably not cover all expenses but it will help.

Both employees get company vehicles at no cost, fuel, insuarance included, vacations, sick days as required and personal days as we all have lives and problems. Don't for a minute judge me and how i treat my employees.

Thanks for the info folks, I've got alot of homework to do. I'll post when I make a decision on a plan.

[Blinky the 3-eyed Fish]

Acknowledge their value to you and your business then and that may cease your qualms about providing for their retirement too.

[Guest joeyd]

Blinky, how many employees do you have? Was it six or seven? How many years experience do you have running a business with employees?

I learned many years ago when my kids were infantsand I found myself free to express my opinions to other friends / parents with older children and teenagers. i knew it all and freely expressed my opinions. As i grew up I realized quickly not to open my mouth until I have walked in that person's shoes. It's solid adice.

Blinky have you had a year when your W2 was under $20k and three employees had 40-65K. It happened to me two times. I paid my employees and all the bills and sucked it up. How many time did you experience that Blinky? Stop throwing darts at someone who you know nothing about.

[david rigby]

Gentlemen,

Perhaps we can cease the dart-throwing and negative comments, and get back to productive discourse. Thanks.

For joeyd, several previous comments should be useful to you. IMHO, the most important is that you should engage the services of an experienced retirement consultant to assist in your plan design. Important facts (in no particular order) will include items such as

- C corp or S corp?

- what type of benefit do you want to provide?

- what level of benefit do you want to provide?

- what employees do you want to cover?

- what level of funding can you expect (short-term and long-term are both important and may have different answers)?

IMHO, when you engage an expert consultant, you may or may not decide to exclude individuals who already have a "preference", that is your choice. But, if you listen to such an expert, be sure to listen to some other experts before you make a decision.

After you get some of this advice, then you may choose to come back to these Boards to bounce those ideas off the larger community. Most of us like responding to such inquiries (it is difficult to do so without some framework first).

[Blinky the 3-eyed Fish]

All I am pointing out is the dichotomous nature of your remarks. Your fiesty comments indicate you probably do appreciate your employees and provide well for them, although the sentiment of the post I challenged was different. With your benevolence you think that the a pension plan just for you is appropriate. The Internal Revenue Code says differently.

I don't know you, you don't know me. Let's move on with our lives. Report back what you find and we will all discuss it. You will make an informed decision. It will probably be a good one. You will be happy you did it and the happiness will show to your customers who will refer you to others. You will become richer, get a little pot belly and keel over in your bean salad old and content.

[Guest joeyd]

Blinky, get a life. Please refrain from contributing to my post any further and i will no longer make reference to you or your posts again.

Regards

[Blinky the 3-eyed Fish]

WOW! And I thought I was being nice.

[GBurns]

Well said joeyd. It is nice to see you defend yourself without getting abusive which is something some of our posters have not yet learned to do.

Do not take Blinky too seriously, he probably did not read your post very well, note the moniker plus it might have been chilly. But even if he had, it seems that his business owning or entrepreneurial experience might be lacking and so he would not understand.

Let us know how you are progressing and seek some comments, even those that will have to taken with a grain of salt.

[Guest Donkey Kong]

Well said joeyd. It is nice to see you defend yourself without getting abusive which is something some of our posters have not yet learned to do.

This is most definitely the pot calling the kettle black. I give you 3 posts before you annoy someone else GB.

[david rigby]

WOW! And I thought I was being nice.

No you weren't.

[Guest Donkey Kong]

Gentlemen,

Perhaps we can cease the dart-throwing and negative comments, and get back to productive discourse. Thanks.

Pax, you fail to meet your own standards.

[GBurns]

Donkey Kong

Don't you ever feel like contributing something of value to any discussion even once in a while?

It seems that you only post short snide remarks.

[Guest ActuaryWannabe]

Blinky, are you and Donkey Kong the same person?

[AndyH]

GB, I had to look up the word "snide" and your picture appears under the definition. Class of 1963, right? And the sound byte has that accent of yours-what type is it again?

I thought you might enjoy a description of you that I recently received in an email from another board member that you have yet to tangle with

".....that individual is the rudest, most offensive person to use the message board."

Thought you'd enjoy that since it is most clearly your objective.

[Guest ActuaryWannabe]

Blinky, are you and Donkey Kong the same person?

and quint the shark hunter too?

[GBurns]

quint,

I guess the old saying is true, Birds of a feather flock together.

How about trying to contribute something of value every once in a while?

What benefit do you get from spending time researching for my personal info?

[AndyH]

Wannabe, do I look or talk like them? And, BTW, do you quote yourself often? ?

GB, you do provide quite a bit of entertainment. Too bad you don't stop there. Somebody needs to police you. Was it class of 63? Come on now.

[Guest ActuaryWannabe]

Can I take that as a "yes"?

[AndyH]

Nope

[Dave Baker]

Yikes, we have a catfight on the retirement plans board! The squawling has reached your humble BenefitsLink publisher all the way up in his ivory tower.

Will everyone please take a deep breath? Might be smart not to post anything further for a day.

I would've expected this on the VEBAs message board, but not here.

Thanks for your participation on the message boards, everybody ... we have the sharpest bunch of actuaries/lawyers/administrators/marine life/mammals on the net.

[Guest joeyd]

Didn't mean to start any trouble, just looking for some advice. Thanks for all the educated posts. You have provided alot of info for me to digest.

[Lori Friedman]

I would've expected this on the VEBAs message board, but not here.

Dave, your comment caught my attention. Does the VEBA forum tend to have ruder or nastier postings than the message board in general?

[Guest joeyd]

I would've expected this on the VEBAs message board, but not here.

Dave, your comment caught my attention. Does the VEBA forum tend to have ruder or nastier postings than the message board in general?

I started this thread some time ago and have not " had the time" to persue a pension plan. I did recieve an email from a member offering help but did not properly follow-up with her. Apologies to her and hoping someone could PM me with some insight and advice on a plan to suit my needs.

Thanks,

Joe

[Mike Preston]

I started this thread some time ago and have not " had the time" to persue a pension plan. I did recieve an email from a member offering help but did not properly follow-up with her. Apologies to her and hoping someone could PM me with some insight and advice on a plan to suit my needs.

Thanks,

Joe

Joe, I don't think you are going to like this post very much, but I could be wrong. However, before I start let me assure you that I do a fairly decent job of working with business owners in similar circumstances, so I'm not spouting theory here. You can ask others on Benefitslink privately to confirm my bravado if you like, or look at my posting history.

You must understand, before you start, that it will be absolutely and completely impossible for you to establish a retirement plan that provides you with any substantial accumulation while simultaneously allowing you to completely avoid contributing on behalf of at least some of your employees.

For some reason, your most recent messages have adopted the theme that you would like to see your contributions for employees completely avoided. I'm not sure why that is, because you started out by saying that you merely wanted to minimize your contributions for employees. The latter is normal, the former is almost (but not completely) impossible.

I think it might have been a retrenchment due to the fact that you were being attacked for not wanting to provide more than the minimum necessary. And there really was no cause to attack you for that, as it is the normal desire of most small business owners.

Congress (and the IRS) recognizes the fact that most small business owners want to provide only the minimum and they therefore set up a bizarre and almost unintelligible set of rules that a business must conform to in order to ensure that the plan is a true "retirement plan" (what we in the business call a "qualified" plan).

However, if you have retrenched into a position of not wanting to contribute anything for your employees, you might save yourself some time and give up on pursuing a true retirement plan.

Let's start at the bottom of the barrel: a plain 401(k) plan. If you put one of these in, you can limit your deferrals to that which your employees provide FOR YOU (that is not a typo) with their own deferrals. At one end of the spectrum, if they don't defer a dime, you can't either. If enough of them defer "enough" you can defer $15,000 in 2006. That's it. If putting in 15k is enough for you, then I suggest you go for a plain 401(k) and "convince" your employees to defer into the plan. By "convince" I mean provide them with enough information and education so that they understand it is advantageous for them to put their own money in the plan.

At the other end of the spectrum is a "defined benefit" plan where you can get upwards of about $85,000 per year put into a plan on your own behalf, but it will cost you quite a bit in both administrative fees and employee costs. How much it costs you in employee costs depends on a number of factors, such as your specific employees, your employement/compensation history (and theirs) and the plan design itself but an example of your foreman might be something like $15,000 per year (subject to a vesting schedule). And that is just for him. Yes, there are ways to reduce the cost below that amount (assuming it is even that high), but I wanted to give you a feel for what the expense MIGHT be for an increase in your retirement "contribution" from something like $15,000 (the max you can get without contributing A DIME to employees - assuming that they defer enough on their own) and $85,000 (the amount you can get if you go to the other end of the spectrum).

By the way, these can actually be combined, so that in a perfect world you could actually get around $100,000 put away for yourself.

Don't be alarmed. Most people don't go that route. #1 it is expensive and most can't afford it (even in the good years). #2 is that there are a great number of peculiarities associated with a successful defined benefit plan, many of which are deal-breakers. Suffce it to say that Congress and the IRS don't allow the big-ticket retirement contribution for yourself (~$85k) without extracting a pound or two of flesh.

Most people, in fact, go the route that is just about 1/2 between the maximum and the bottom of the barrel. For example, if you are willing to put in a 5% of pay contribution for one, two or more of your tempororary workers (you don't mention how many hours they might work in a year) then you might be able to get the maximum allowed under law for yourself in this type of plan ($44,000). I say might because it is highly dependent upon the exact ages and hire dates of ALL of your employees (even those that work for you for only a very short period of time - yes - even 1 day).

I will end by suggesting that you contact a plan design person you want to work with. If that is somebody local to you, then contact somebody local. If not, then you can send a private message to anybody that you feel you would want to work with.

Many provide "proposals" for free (I don't). That is, they will collect your employee census (and historical information to the extent important) and provide you with a comparison of what you might be looking at for 2006, given various plan designs that they are comfortable with.

I wish you well and good fortune in your search.

[stephen]

Excellent advice from Mike.

I also want to mention that a safe harbor 401(k) plan might be a good fit for you and your company. With a 3% 100% vested contribution to all of your eligble employees you can maximize your 401(k) contribution ($15,000 in 2006) and get the 3% contribution as well. Should your employes choose to defer they will have their deferrals along with their 3%. Combining this with an integrated profit sharing plan contribution for the good years may get you the contributions you want at a minimal expense.

Another option not yet mentioned is a non-qualified plan.

I wish you the best of luck in your search for a plan that fit's your and your compnies needs.

[Guest joeyd]

Thanks Mike and Stephen for your replies. I fully appreciate that as a small business owner I cannot have a retirement plan for myself only while excluding my employees. What I am looking for is the best plan that maximizes my retirement funding. There are numerous differing plans some of which will be beneficial to me individually and the business and others that would not. I am merely looking for the best plan available. Thanks for your input.

[movedon]

joeyd-

What's your annual contribution budget in your best and worst years? Send me a private message if you'd like. I'll give you a friendly qualified free tip or two (I'm knowledegable re small business retirement plans, but I'm not in this segment of the industry at the moment, so I have nothing to sell).

[Larry M]

joeyd,

The comments made by Mike Preston should give to you a good idea as to the range of contributions you can make to a plan today.

Please bear in mind the following:

1. any amounts contributed to a qualified plan represent tax deferrals. Eventually, a tax will be paid when the amounts are withdrawn (assuming no major change in basic tax law).

2. there is no "best" plan which can be designed to day and which will remain the "best" plan forever. As we grow older and our needs change, so may another plan become "best" for that situation; further, Congress has a long history of micromanaging qualifiedplans so often it almost seems as if there is a new set of rules emanating on a daily basis.

3. If you do establish a plan, use the qualified plan assets as if they were sacrosanct. Invest them wisely.

4. from one of your comments, I got the impression you are in the construction business. As such, you can understand the difficulty you would have if I should ask you to come up with the "best" house design. You understand, much better than I, there are an infinite combination of design features and materials which can go into a house - and we have not considered the location, not have we considered changes in building codes.

So it is with qualified plans.

You can discuss the options, consider the alternatives, understand the nature of Congress is to change the playing field whenever such items as tax revenues or major layoffs become hot, and with all that, decide upon a plan which meets most of your objectives but still allows you some flexibility if things change.

There are a lot of extremely knowledgable people on these boards - many of whom could help you.But you need personal service which is beyond on capabilities on a public forum.

I suggest you contact a local attorney who is knowledgable in qualified plans (your accountant should know a couple) and sit with him or her for an hour or so getting personal advice.

Then, with the attorney's and accountant's help, choose a capable consulting actuary or plan administrator to help you fine tune the plan which most closely fits your current needs and capabilities.