Designing the Right Retirement Plan Package Pennsylvania C P A Journal (Quarter 3) Vol. 73, No. 3 p.32; Panebianco, Janet
Among the more than 440 Internal Revenue Code changes in last year's Economic Growth and Tax Relief Reconciliation Act were a number of provisions covering qualified retirement plans, a number of them favorable. However, there are also complicated rules for the phase-in period, which means a CPA should work with a business owner to determine which sort of plan would best meet the owner's criteria. For small businesses with fewer than 100 employees, the SIMPLE IRA may be better than a qualified retirement plan, but those business owners with the desire and ability to contribute more than allowed with a SIMPLE IRA may be more interested in a qualified retirement plan, the most popular of which is the 401(k). The 401(k) has certain annual administration requirements, including tax filing, record keeping, administration, reporting, and discrimination testing, and most small business owners hire third-party administrators to handle these services. Owners that want to take advantage of a 401(k) for employees while also participating themselves to the greatest extent possible may have to modify the 401(k), given the fact that businesses must meet annual discrimination tests in order for "highly compensated" employees to use the deferral and matching features. Generally, the average amount deferred by highly compensated employees can only be 2 percentage points higher than the average deferral of non-highly compensated employees. To maximize the deferral feature, many of the non-highly compensated employees need to participate, which means the employer may need to provide an incentive to increase participation. There is also a safe-harbor provision under which the employer may be exempted from meeting the discrimination test so long as the employer meets certain other criteria.