DOLLARS AND $ENSE by Richard Vera II, MBA, CPA, DABFA Of CPA & Financial Services, L.L.C. Atlantic Highlands, New Jersey CPA@cpafs.com   contact Richard Vera

View Archive   Atlantic Highlands Herald published September 20, 2001

RETIREMENT PLANS OFFER ADVANTAGES & DISADVANTAGES

Profit sharing and money-purchase pension plans are true qualified plans. The IRS requires that they be adopted before fiscal year-end. They also involve annual reporting and numerous disclosures to the IRS and Department of Labor. 

The money-purchase plan has a fixed contribution percentage that must be funded each year, while profit sharing has flexible contribution requirements.

Administrative costs and increased paperwork are the primary disadvantages of profit sharing and money-purchase plans, yet they do provide the following advantages: 

• Gradual vesting schedules, providing an incentive for continued service from employees.
  

• Non-vested forfeitures may be reallocated to remaining employee participants or used to reduce future employer contributions. 
  

• Part-time employees who work less than 1,000 hours may be excluded from participation. Special documents may be drafted to exclude those not employed on the last day of the plan year. 

Is profit sharing best for your business? The answer lies in whether you are willing to pay the additional administrative fees to gain the advantages of a qualified plan.

Depending on your rate of turnover and the rate of your contributions, forfeitures allocated to key employees under profit sharing could exceed any annual administrative costs. Therefore, if you experience high turnover in the second or third years of employment, consider the qualified plan to take advantage of forfeitures created by the vesting schedule.

There are no mandatory levels of contribution with a profit-sharing plan. Thus, employers with unstable or widely fluctuating profits would make contributions only when feasible.

Finally, larger employers (greater than 15-20 employees) will generally benefit from a profit sharing plan. The combination of the vesting schedule and ability to exclude part-time employees will usually more than offset administrative costs.

The money-purchase plan allows for contributions of up to 25 percent of compensation, which is 10 percentage points higher than other such plans. A typical money-purchase employer will have high retained earnings, stable profits and a desire to share profits with employees. This plan is equally effective for small or large employers.

Regardless of the retirement plan you choose for your business, it can make a substantial difference in your employees' lives and in your business operations.

Rich Vera, CPA practices at CPA & Financial Services, LLC, located at 971 Leonardville Road, Atlantic Highlands. A full service firm offering Income Tax Preparation, IRS Representation, QuickBooks Support, Notary Public Services, Investment and Brokerage Services, Mortgages, and Prepaid Accounting Services. You can contact him at: Ph: (732) 291-8546 ¨ Fax: (732) 872-6447 ¨ E-mail: CPA@cpafs.com ¨ Visit: http://www.cpafs.com/

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