Having had a decent year,
and with our fiscal year-end fast approaching, I called my accountant,
Fran, and asked him what I could do to help reduce my taxes.
"Well," he replied, "you
could pre-pay my bill for preparing your business tax return and write it
off as an expense for this year rather than next."
"That’s very generous of you.
"The only other thing I can think
of right off the top of my head is to set up that profit-sharing plan we’ve
Oh yeah. That.
For years I’ve thought about
establishing a profit-sharing/pension plan payable at retirement for me
and my employees. I’ve hesitated because, although there have been
profits, there never seemed to be enough cash to fund a plan. Expansion,
debt reduction and payment of taxes had a higher priority.
This year was a little different. For a
variety of reasons, there was a piddling amount of cash available that I
could responsibly put into a retirement fund. Then, if I put an equal
amount in every year, by the time I was 107 or so I’d be living high off
But this wasn’t just for me. The
federal government, in its infinite wisdom, makes certain that any company
retirement plans include a comparable contribution (based on a percentage
of annual compensation) to all employees of a company who are over 21,
have had one year of continuous service and work over 1,000 hours per
Like they tell you in
kindergarten, you have to share. If you don’t want to share, says
the IRS, you get nothing.
The contributions to the plan, of
course, are tax deductible, thereby reducing taxable income. The money
goes into a retirement account for each employee which they can’t touch
until they’re 59-1/2 years old. If they leave the company, they can roll
the funds into an Individual Retirement Account (IRA) or take the cash at
that time, paying taxes and a strict 10 percent penalty.
There’s another catch. While a
contribution is made for every eligible employee, the plan can be set up
on a five-year vesting schedule, meaning an employee leaving the company
after only one year of eligible service would receive only 20 percent of
the money in their account. The remaining 80 percent would be
redistributed among the active participants in the plan.
"Mmmm, now we’re
talking," I said to Tom, the pension expert who was explaining all
this to me in great detail. "I win both ways. The fund creates
loyalty from the employees, and disloyal employees who leave prematurely
have their wealth stripped from them and redistributed. Sounds fair."
Actually, from a purely financial
standpoint, I was still losing. As the sole owner with dozens of eligible
employees, I’d be better off reporting the income and paying taxes. But
the loyalty factor coupled with the forfeiture factor helped me decide to
go ahead with establishing the plan.
Now I need a marketing person
interested in working on one of the great marketing challenges of all
time: How do you sell a retirement plan to a 22-year-old?
While there are a few older, mature
employees who are beginning to contemplate their golden years, the
majority of people working for my company are in their 20s. Socking money
away for retirement is not high on their list of priorities.
The strangest part is watching the
expressions on the faces of the younger employees when they are told of
their participation in the plan and their respective amounts.
I just know, no matter what they say,
they’re thinking, "Yeah, right. Like I’m ever going to see that
Given the choice, they’d surely take
half the amount if they could get it in cash. Or they’d probably trade
it for a free dinner. Something they can taste.
But there were some employees who were
grateful for the opportunity to save for the future. For instance, Ralph,
my highly sophisticated general manager, was very enthusiastic.
"I think it’s a great
idea," he said when told of the plan. "It’ll help to reduce
turnover and anyone who sticks around can build a little nest egg. One
question, though – who makes the investment decisions regarding the
money in the retirement account?"
I leaned back in my chair and clasped
my hands behind my head, savoring the moment. "As sole trustee, I
Ralph’s enthusiasm, should we say,
soured. His only words were "Uh, oh."