Pension Plan Can Be Vital Tool for Employer

Every year, Willi Winzelberg sets aside about $30,000 to add to a pension fund for himself and his employees at Authorized Camera Service in Sherman Oaks.

“It may seem like a lot of money to put in yearly, but it’s nothing compared to the benefits you get out of it,” said Winzelberg, who was able to give his partner about $67,000 when he retired from the small company three years ago.

“We could take the money we put in the pension plan and increase salaries, but then Uncle Sam would take a chunk of it,” said Winzelberg, who opened the shop in 1975 after working for Nikon for many years.

Winzelberg is one of the millions of small-business owners dealing with the fact that the number of Americans over age 65 is projected to grow from 28 million in 1985 to 49 million by 2020. Aside from the tax advantages, a small business might find that a pension plan helps to retain good employees.

Winzelberg plans to retire next year and turn the business over to a longtime employee. Then Winzelberg will reap the benefits of the pension plan he set up several years ago at the suggestion of his accountant.

Authorized Camera Service’s pension plan is administered by Sam Gilbert, a pension administrator who specializes in counseling small-business owners at his United Plan Administrators office in Sherman Oaks.

Gilbert and other pension experts said having a pension plan is important for a small business, even though the federal rules and regulations governing most plans are complex and burdensome. The main attraction is that all the money put into a pension fund is deductible as a business expense.

“The money becomes taxable only when it is distributed to employees,” Gilbert said.

Where to invest pension money is left up to the business owner and his or her financial adviser. Most small-business owners invest their pension money in government bonds, certificates of deposit and other conservative investments. However, many businesses still put money in the stock market, believing that the higher return on investment is worth the risk.

Small-business owners have four basic options available to them when they are ready to set up a pension plan:

- A profit-sharing plan allows a business owner to set aside up to 15% of each employee’s annual compensation. Under this type of plan, the percentages can change each year depending on the company’s fortunes. Employees do not contribute anything to a profit-sharing plan.

- Business owners who select what is known as a money purchase pension plan may set aside up to 25% of a person’s salary, but the percentage must stay the same each year.

- Defined-benefit pension plans pay out a set percentage of a person’s total compensation when he retires. Each year, the company must contribute as much as it takes to fund that desired benefit.

- One pension option growing in popularity is named after a section of the U.S. tax code. A 401(k) plan enables both the employee and the employer to contribute tax free. Most employers match the employee contribution in some way, but it is not required.

Gilbert said Congress has recently made the popular defined-benefit plans “super-complex, costly and reduced the benefits.”

Most pension administrators charge $1,000 to $2,000 a year to administer a plan. Some also charge an additional fee based on the number of employees covered.

Because so many large- and small-business owners are complaining about the complex pension regulations, Gilbert said Congress has agreed to hold hearings on the issue in the spring.

“Most of the problems are caused because the people writing the laws do not know business,” said Paula Calimafde, president of the 1,000-member Small Business Council of America in Bethesda, Md.

Calimafde, a tax attorney who specializes in pension matters, said a pension plan can be a “very valuable tool” for a small business.

“It seems to me that small businesses that have pension plans are very successful in building up income,” she said.

Donna Hopson, president of the Santa Ana-based National Institute of Pension Administrators, said once you decide to set up a plan, you must fully understand the requirements.

Hopson, who is president of the Christenson-Hopson Co. in Santa Ana, said she is currently helping a bike shop owner who didn’t realize that he had to put $50,000 into his pension plan every year, no matter how good or bad his sales were. Hopson is working with him to terminate that plan and set up something easier for him to handle.

Although she does not counsel clients about where to invest their pension funds, she does stress the need to be conservative.

“We drum into their heads that this is your retirement, don’t lose it, don’t gamble,” she said. “Be careful, it’s not Monopoly money.”

PLANNING A PENSION PLAN

Here are some tips for employers on setting up a pension plan:

Consider setting up a retirement plan when your business is stable and growing.

Use your pension benefit as anincentive to attract and retain good employees.

Choose your plan based on your company’s needs. Companies with cyclic sales should consider a profit-sharing plan, rather than a fixed-rate plan.

Pension planners say 401(k) plans are popular because the employees are contributing a portion of their salary and feel more involved in their security.

Make sure you understand exactly what the administrative costs will be. If a plan is too expensive to maintain, it may become a burden for your company.

Look for a pension administrator that provides incentives for clients to reduce fees.