Business Owner's Playbook - The Hartford

More documents

Recommendations

Info

The Growing CompanyYour Life, Your FutureConversationStartersHelp your advisors helpyou by asking them . . .■ Can I enhance mycompany’s retirementbenefits?■ How should I bethinking about myown investments inthis phase?Retirement PlanningTwo-thirds ofbusiness ownersworry about havingenough moneyfor retirement.About one-fifth ofsmall businesses(fewer than 100employees) offera 401(k) plan.Source: The HartfordBusiness Owners Survey,October 2006A retirement plan is probably onyour radar screen at this point.Companies establish differentplans for different reasons – whyare you establishing yours? Toget maximum tax benefit foryourself and your key employees?To attract and retain employeeswith the skills you need?Answers to these questions willhelp you decide what type ofplan and features you need.Consider a qualified companyretirement plan that willenhance your future andthat of your employees.There are a variety of plans availabletoday, including straightforward,economical plans designed forsmall business owners. Byoffering a retirement plan, youstand to gain several benefits.Small businesses may be eligiblefor a three-year tax credit of upto $500 for setting up a newretirement plan. Your employees,too, might be eligible for taxincentives for their contributionsto the plan. A retirement plancan also be a valuable recruitmentand retention tool. Today, thereare more plan and investmentoptions than ever; speak to youraccountant or financial planner.Qualified vs. non-qualifiedplans . . . “qualified” plans areeligible for special tax treatment;however, you must satisfy certainnon-discrimination requirementsintended to provide benefitsfor rank-and-file employees.Non-qualified plans allow youto pick and choose the benefitsfor selected employees, but theymay not have all the benefits oftax-qualified plans. Talk to youraccountant for specifics.Defined Benefit PlansA plan in which the employerputs aside and invests retirementmonies. Employees are guaranteeda defined benefit at retirement.These can be expensive foremployers and are falling outof favor.Defined Contribution PlansMost current retirement plansare defined contribution plans, inwhich employer and/or employeecontribute to the employee’sretirement account and theparticipant bears the investmentrisk. Within this category ofplans, there are many variations,each one appropriate for differentkinds of businesses in differentcircumstances. You have severalchoices. The chart on page 25is representative of many but notall the choices.Take advantage of otherways to save for the future.If you can put away other moniesfor retirement, all the better.Business owners need to diversifytheir investment risk away fromtheir business, and they need toassess this in determining how tobalance their portfolio. Workwith your accountant or financialplanner to look into investmentsthat balance risk and growth.The first step is to tally up yourassets and determine their relativesecurity, what they’re worth nowand how much income they canproduce annually, now and overtime. Then, fill in the gaps.Consider saving for yourchildren’s education.It’s often recommended thatyou fund health insurance andretirement before college, asthere are other resources – loans,scholarships, jobs, help fromrelatives – that may be availableto your children when theyreach college age.Section 529 CollegeSavings PlanIf you have sufficient funds, thisis one tax-advantaged educationsavings plan. It differs from stateto state; you can start onethrough your own state’s plan orthrough the several states thatoffer their product interstate.Don’t Neglect YourOwn RetirementBenefits for your entireworkforce might still befinancially out of reach foryour growing company, butyou should discuss your ownretirement with your accountantor financial planner. Don’tforget that as a self-employedentrepreneur, you are allowedto fund an IRA for yourselfand your spouse. You canalso grow your assets in a lifeinsurance policy and beprotected at the same time.24
GrowingEmployer-Sponsored Defined Contribution PlansPlan Benefits ConsiderationsThe Simplified Employee Pension IRA (SEP IRA)Employer-sponsored IRA, meaning that contributions are made by theemployer rather than the employee. A SEP IRA has higher contributionlimits than a traditional IRA. However, the employer’s contribution mustbe allocated to all eligible employees, based on specific formulas.Generally, a SEP IRA allows you to set aside up to 25 percent of your netearnings (but no more than $46,000 per employee) in a qualified (tax-advantaged)retirement fund, (effectively reduced to 20 percent if you’re a soleproprietor because the contribution itself reduces qualifying income, butcompensation in excess of $230,000 [2008] is not taken into account).Money you set aside is both tax-deductible in the current year andtax-deferred until you receive a distribution.**Distributions are subject to ordinary income tax and if taken prior to age 59 1 /2, the distributionmay also be subject to a 10 percent federal tax penalty.• Great option for asmaller business.• Fairly simple toimplement; doesn’trequire a third-partyadministrator or filingof tax forms.• Does not requireongoing contributions.• Can be expensive to fund.• Employee contributions arenot allowed.• Employer contributions areimmediately vested.The Savings Incentive Match Plans for Employees IRA (SIMPLE IRA)IRA-based plan that gives small employers a simplified method to allowemployees to contribute, and to make employer contributions toward theiremployees' retirement and their own retirement. Under a SIMPLE IRA plan,employees may choose to make salary reduction contributions and theemployer makes matching or non-elective contributions.Eligible employees may contribute up to $10,500 in 2008 ($13,000 ifage 50 or older in 2008) with no percentage limit. Generally, the employermust make dollar-for-dollar matching employer contributions on the first3 percent the employee contributed.• Simple to operate andadministrate. Minimalpaperwork, expenseand tax filing.• May be established onlyby employers that had nomore than 100 employeeswho earned $5,000 or morein compensation duringthe preceding calendaryear (the "100-employeelimitation"), and do notcurrently maintain anotherretirement plan.401(k)Popular option for companies with more staff. Taxes on accrued earningsare deferred until retirement. The employee can elect to set aside apercentage of salary up to $15,500 in 2008 ($20,500 if age 50 or olderin 2008). The employer may make matching contributions to the employee’saccount based on a percentage of the employee contribution.• Many companies matchemployee contributions,and can make discretionarycontributions,up to $46,000 peremployee.• Higher employeecontribution limit thanSIMPLE plans or IRAs.• Administrative fees maymake them less attractiveto smaller firms.• Subject to annual IRSreporting.Qualified Profit-Sharing PlansMay be attractive to those businesses whose profits might vary from year toyear, since they allow annual contributions to fluctuate with the company’sfortunes. Some allow employee contributions of after-tax income.• Permits employers tomake discretionarycontributions, up to$45,000 per employee.• Subject to annual IRS andDOL reporting.Age-Weighted Profit-Sharing PlansRetirement plans that usually let older workers accrue benefits faster thanyounger employees. The plan assumes that younger employees have moretime to save for retirement.The company contributes to each employee’s retirement fund based on ageand compensation level.Solo Defined Benefit PlansFunded by the employer and pay a defined benefit at retirement. Undera typical defined benefit plan, a participant’s accrued benefit is notdetermined by the investment results of an individual account but insteadis a fixed benefit determined by a plan formula, typically based on years ofservice and level of average pay. May be most appropriate for high-incomeearners looking for the highest tax deduction.• Appropriate forbusiness owners whohave increased theirown compensationsignificantly and havemostly youngeremployees.• The employer’scontribution obligationto fund the plan isdetermined with thehelp of an actuary.• Must be carefully structured,so not to violate the government’s"non-discrimination"rules for retirement programs.Subject to annual IRS andDOL reporting.• Can require the employer tocontribute large sums over arelatively brief period of time.• Can be costly to administerbecause an actuary isrequired.• Subject to annual IRS andDOL reporting.25
Page 5 and 6: The Emerging CompanyThe Topic of Co
Page 7: EmergingTake steps to protectperson
Page 10 and 11: The Emerging CompanyInsurance (cont
Page 12 and 13: The Emerging CompanyYour Life, Your
Page 14 and 15: The Emerging CompanyYour WorldConve
Page 17 and 18: The Growing CompanyThe Topic of Con
Page 19 and 20: GrowingVenture Capitalists‘VCs’
Page 21 and 22: GrowingComparing the Three Major Ty
Page 23 and 24: GrowingDemystifying Business Insura
Page 25: GrowingDemystifying Business Insura
Page 29: GrowingInvestment Advice: Whereto t
Page 32 and 33: The Transitioning CompanyFinanceCon
Page 34 and 35: The Transitioning CompanyCompensati
Page 36 and 37: The Transitioning CompanyYour Life,
Page 38 and 39: The Transitioning CompanyYour World
Page 40 and 41: Discussion GuideStructuring Your Co
Page 42 and 43: Notes40
Page 44: For additional information visitwww

Business Owner's Playbook - The Hartford

Create successful ePaper yourself

Delete template?

Save as template?