SMALL BUSINESS: Retirement plans still doable

New York —- One of the first questions many small business owners hear from accountants at tax time is whether they’ve started or funded a retirement plan. That’s a painful topic for many owners during a recession.

A company owner worried about cash flow might feel there’s no choice but to forgo starting a plan, or, if the business already has one, cutting back or suspending matches to employees’ plan contributions. Small businesses that do suspend or reduce matches are part of a growing list of companies including Fortune 500 members FedEx Inc., UPS Inc., Sprint Nextel Inc. and Visteon Corp. trying to preserve sagging profits or cut their losses.

Still other companies might be in good financial shape, but are curtailing these benefits because they’re concerned about what lies ahead in this recession. Or, they might be shying away from starting a plan, assuming that employees aren’t interested right now because stocks keep falling.

People who advise small companies about finances or employment matters generally advocate setting up and funding a retirement plan, even in tough times, because it’s good for business.

“Especially for a small business that’s becoming an attraction that employees want to have,” said Richard G. Rawson, president of Administaff, a Houston-based company that provides human resources outsourcing. “They want to save for the future.”

Retirement plans have been a huge recruitment and retention tool, and cutting these benefits will be painful for staffers. Rawson noted, however, that in this economy, many people are likely to understand. “They’re happy to have a job,” he said.

Companies continue to start plans despite the recession. Rawson said 78 Administaff small-business customers set up plans in January, compared with 89 a year earlier. And the number of companies starting plans in 2008 rose from the previous year —- 755 versus 719.

If a company really doesn’t have the money to contribute to the plan, it can at least create retirement accounts that employees can fund themselves through contributions deducted from their paychecks.

Americans clearly want to save more; the Commerce Department has reported that the nation’s savings rate, as a percentage of after-tax incomes, rose to 2.9 percent in the last three months of 2008, up sharply from 1.2 percent in the third quarter and less than 1 percent a year earlier.

Moreover, Rawson said, “one of the reasons for setting up a plan at this point, with the market so far down, this is a great opportunity for people to be investing.”

Of course, there are options besides stocks for retirement plans, so employees who are fearful of the market can still save and get a tax benefit. The simplest retirement plans include savings accounts at banks, and more complex 401(k)s usually include a guaranteed income option that protects a saver’s principal.

The tax laws provide some wiggle room for small businesses that have a retirement plan known as a SEP, or Simplified Employee Pension, or a SIMPLE, short for Simplified Employee Pension. Employers’ matching contributions to these plans don’t need to be made until the due date of the employer’s return, including extensions. That means 2008 contributions for a corporation don’t need to be made until Sept. 15, and a sole proprietor filing a Schedule C along with a 1040 form has until Oct. 15 —- provided that the employer has gotten an automatic extension of the April 15 filing deadline.

This also means that contributions for 2009 don’t have to be made until well into 2010.

Moreover, a small-business owner who wants to create a SEP plan, which is the simplest and least paperwork-burdened of the retirement plans, can still set one up for 2008 as long as it’s done by the filing deadlines.

Owners should consult with tax professionals, and perhaps with human resources consultants, before setting up retirement plans. The IRS has a primer on retirement plans aimed at small companies: Publication 560, Retirement Plans for Small Businesses.

It can be found on the agency’s Web site at www.irs.gov/pub/irs-pdf/p560.pdf.