Not sellable: Not every company is sellable, either to a third party or to management. Not every company is transferable to family members. Establishing a solid retirement plan may be a very good option for a business owner to offset the company’s inability to be sold or transferred.
Good news: The U.S. government has created ways to help owners of privately held companies to put tax-deferred money into approved retirement plans. (Tax deferral refers to instances where a taxpayer can delay paying taxes to some future period.)
Good news: Companies with no employees may be able to tax-defer about $55,000 annually into a SEP/IRA with very little regulatory paperwork. Most banks, wealth managers and lending institutions can easily help with the paperwork on these plans.
Good news: Many owners are familiar with a Defined Contribution (DC) plan. The most options provided under the DC umbrella are 401(k) plans and profit-sharing plans. These plans are often viewed by owners as a way to attract and retain talent. Prospective employees often compare potential employers together and frequently lean towards an employer that provides such plans.
Bad news: DC plans discriminate against highly compensated business owners. Annual testing is required to make sure the highly compensated in the company have not contributed more than the maximum ceiling, which can be a very low amount for the company’s highly compensated. Penalties and/or a requirement to take DC money into taxable income may arise if contributions exceed the limits set by the Department of Labor. As such, most owners do not view DC plans as a good way to build a solid retirement plan.
Good news: With proper professional assistance, some companies may adopt a defined benefit (DB) plan (sometimes known as a Cash Balance Plan) in addition to maintaining the existing defined contribution (DC) plan. The employer must maintain the employee anti-discrimination rules within the DC plan, however, the employer may be able to significantly discriminate in favor of highly compensated employees within the DB plan. The combination of these two plans, along with proper funding, may allow the owner to put away significant tax-deferred money.
TPA: Third Party Administrators (TPAs) are necessary to follow the rules and regulations of DC and DB plans. An owner will want to ask a number of professionals within the community to find a gold-standard TPA firm.