Defined benefit plans for small businesses

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By 1st Global Staff

Imagine this scenario: Greg is a 55-year-old client who has owned a highly successful marketing firm for 20 years. He has three employees in their 20s and early 30s who make between $20, 000 and $35, 000 a year, while Greg takes home $200, 000 a year. Greg is looking for a retirement plan that will allow the maximum contribution and provide the biggest tax deduction and savings. Greg has not saved as much for retirement as he would like because his focus has been getting his children through college. He is now ready to contribute as much as possible to a retirement plan, as he wants to retire in the next five to 10 years.

How would you advise this client?

While small business owners typically use defined-contribution plans with an elective deferral feature to provide retirement benefits to employees, defined-benefit plans may be ideal for small-business owners over 50 who are interested in saving a substantial amount of money for retirement in a short time period.

Defined-benefit plans promise a specific annual retirement benefit based on the percentage of current income the business owner wants to have at retirement, or the percentage of current income he or she can comfortably afford to contribute, up to an annual maximum of $200, 000. These plans are best suited for small business owners who are at least 40, earn $100, 000 or more a year, plan to contribute more than $50, 000 annually to their retirement and have five or fewer employees.

Sponsoring a defined-benefit plan for employees provides them with a determined monthly benefit upon retirement. Defined-benefit plans can be structured to reward employees who stay with the company while minimizing retirement benefits to those employees with short tenures. Participants are not taxed on the retirement benefit until they actually receive a distribution from the defined-benefit plan. An added benefit to the small business owner is that employer contributions provided to a defined-benefit plan are fully deductible as an ordinary business expense.

When considering sponsoring a defined-benefit plan, small business owners must also consider the costs and expenses associated with operating a defined-benefit plan. Such expenses include:

  • Funding the defined-benefit plan
  • Retaining an actuary to determine the amount of the employer contributions
  • Insurance premiums for the defined-benefit plan if the business has more than 26 employees

However, the advantages of defined-benefit plans often outweigh these expenses for small business owners in their late 40s, early 50s or older who meet the following criteria:

  • They want to maximize their annual retirement contribution and are seeking the maximum tax deduction
  • The company has stable cash flow
  • The company has no employees, few employees or a number of employees who are significantly younger than the owner

Wiley Prepare for the Worst, Plan for the Best: Disaster Preparedness and Recovery for Small Businesses
Book (Wiley)
2007-07-25 10:51:58 by outsource-IT?

What happens if he goes out partying one weekend

And gets killed in a car wreck?
Smart business people have a contingency plan for events like that. If I had 3 IT guys I wouldn't worry, but I don't want to hire 2 more for a small business. Finding short term help on CL is one type of contingency plan, but I was wondering is there are any businesses that offer this type of service.
I'm not concerned about docs and passwords, we have full backups stored offsite in our bank vault.

2008-06-11 16:12:25 by HR_Mgr

HAHAHA you fucking moron

You are REALLY ignorant about how hotels run. There's a beautiful thing called attrition. If groups cancel, WE STILL GET MONEY. If corporate business cancel in our busiest transient season (now through the end of Oct), we can fill the room blocks with transient guests. So trust me, I'm not worried.
You have to understand that major 300m+ businesses like the one I work for have plans in place for slow economic times. Defense was one of the governement entities that was actually BUSIER, you think that's the only one? Of course not. Since room blocks are usually booked out a considerable time out and in the contracts attrition is included so you STILL get money if they cancel, it's easy to change the businesses you target

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