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I own a sole proprietorship with my wife as sole employee. We use a SEP (simplified employee pension) plan as a retirement account. I recently purchased a second business with five full-time employees and would like to put in a retirement account in this new business to provide benefits for these employees and also maximize my own retirement. Can I establish a new retirement plan for this new business and still keep my existing SEP plan? What kind of plan would be best?
-- P.D., New Jersey
Retirement plans involve complex tax- and estate-planning issues, and the specific answers to your questions depend on various details, such as whether you're the full owner of the second company, whether it's in the same industry as your first company, and whether your wife is a co-owner. Your best strategy is to consult a financial planner or retirement-plan specialist who can take a close look at your situation and help you provide the best pension solution for your family and your employees.
That said, some general rules may give you a place to get started. For instance, if you did purchase 100% of the new business and you already own 100% of your sole proprietorship, the rules state that both businesses should be treated as though they were a single employer. "Think of the two businesses as separate locations for the same company," says Brett Goldstein, a pension administrator and president of The Pension Department, a consultancy based in Plainview, N.Y.
OTHER OPTIONS. That means that all your employees must be covered by your SEP plan, which may be a daunting prospect. SEP rules require that all employees over 21, who have earned at least $450 in three of the previous five years, participate in the SEP. So if you continue making SEP contributions for you and your wife, you would have to provide the same coverage for your new employees. If you were to contribute 20% of your salary to the SEP this year, for instance, you would have to contribute the same percentage of salary for all your new employees. Obviously, this could get fairly expensive.
Goldstein recommends that you not start a pension plan for your new company until you have a chance to see how your cash-flow situation shapes up. "I always like to tell people to run the company for a year," he says. "Get a feel for the company first, then...start to think about a pension." If you don't make a personal contribution to your SEP for 2005, you won't have to make a 2005 pension contribution for your employees, either.
If you do decide to offer a retirement plan for your new employees down the line, you may find that a SEP isn't your best option, says Jeff Resnick, a financial planner with Resnick Wealth Management in Valley Stream, N.Y. "SEPs don't offer a lot of leverage for you, so I wouldn't recommend one," he says. Instead, he advises that you look into establishing a 401(k) Safe Harbor plan.
PROFESSIONAL OPINION. "In this plan, you and your wife could each defer $15,000 next year ($20,000 if you were born in 1956 or earlier). In addition, you would each get a match of 4% of your pay. If employees choose to defer from their pay, you would owe them a maximum of 4% of their pay. If they choose not to defer, you owe them nothing," Resnick says. Depending on your age and compensation relative to your employees, a Safe Harbor plan comes with additional benefit and contribution options that you should explore, he adds.
Again, remember that retirement plans are extraordinarily complex and carry with them profound tax and long-term planning consequences. Get a professional involved in designing the right pension option for you and your employees -- you won't regret it. Providing a secure future for everyone involved couldn't be more important.
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