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BEYOND

401(k)S

FOR


SMALL

BUSINESS

OWNERS




SMALL

BUSINESS

OWNERS

A Practical Guide to Incentive,
Deferred Compensation,
and Retirement Plans

JEAN D. SIFLEET

John Wiley & Sons, Inc.



Copyright © 2004 by Jean D. Sifleet, Esq. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or
transmitted in any form or by any means, electronic, mechanical, photocopying,
recording, scanning, or otherwise, except as permitted under Section 107 or 108 of
the 1976 United States Copyright Act, without either the prior written permission of
the Publisher, or authorization through payment of the appropriate per-copy fee to
the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923,
(978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com. Requests
to the Publisher for permission should be addressed to the Permissions Department,
John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax


HD4928.N6S57
658.3′22—dc21

2003

2003041101

Printed in the United States of America.
10 9 8 7 6 5 4 3 2 1


This book is dedicated with great respect to small
business owners who overcome incredible obstacles
and create prosperity for themselves, their families,
and employees.



PREFACE

The goal of this book is to provide information, in clear ordinary language, that enables small business owners to move
ahead with confidence and take advantage of many tools to
enhance compensation and retirement benefits.
In preparing this book, I owe thanks to many people. My
family and friends endured many months of my questions and
requests for feedback. Special thanks are owed to my contributing experts who generously shared their knowledge and
experience so that this book would tell you candidly how to
avoid pitfalls.
Extra special thanks go to Michael Hamilton and the full extended team from John Wiley & Sons, without whose commitment this book would not have happened.

How Does Your Pay Compare?
Use Compensation to Motivate Employees
What Behaviors Do You Want to Encourage? Discourage?
Writing Your Compensation Plan
A Written Plan Will Help You Be Consistent
Using a Calendar Time Line
Next, Create a Visual Calendar Framework for

Your Planning Process
What Is Important to Employees?
Planning Is an Ongoing Process
ix


1

2

2

4

4

5

6

6



Contents

3. What Is Important to Employees?
Employee Input Is Critical
Research Shows Some Reasons for Employee

Dissatisfaction
Research Shows What Employees Typically Want
Improving Noncompensation Issues
Improving Compensation Issues
Has Your Company Done the Following?
Improving Benefits
How to Assess What Your Employees Really Want
Benefit Survey Dos and Don’ts
Conclusions

4. What Is the Current Employee Picture?
Getting an Integrated Picture of the Workforce
Informed Decision Making
Conclusion

5. Family Business?
Recurring Patterns of Family Dynamics
Succession Planning 1-2-3
Special Considerations in Evaluating Options

for a Family Business

6. What Are the Options?


35

36

37


39

39

40

44


47

47

55

68

74

76



Phase 3. Becoming More Profitable
Phase 4. Success! And Your Retirement Approaches
Cross-Tested Profit-Sharing 401A(4)
Defined Benefit Plans
Contributions: Comparing Apples with Apples
Nonqualified Plans
Conclusion

9. Requesting Proposals
10. Implementing Your Plan
Phase 1. Introducing the Plan to Employees
Phase 2. Staying in Compliance with the Law
Conclusion

xi
99

102

105


107

108

110

112



12. Financial Health-Check: Is Your Plan on

Track to Achieve Your Goals?

167


Is Current Funding Adequate for Retirement Needs?
Funding the Shortfall
Get a Second Opinion
Schedule a Financial Health-Check

13. Avoiding Chaos: Estate Planning and

Retirement Planning
Severe Consequences of Doing Nothing
Conclusion

168

169

176

176


179


253



BEYOND

401(k)S

FOR

SMALL

BUSINESS

OWNERS




1


WHAT ARE

YOU TRYING

TO ACCOMPLISH?


Running a business can be so all-consuming that it is easy to

process, this chapter includes checklists and forms to assist
you in prioritizing goals. As you read, ask yourself, “What is
really important to me down the road?”
1. Comfortable retirement?
2. Do not want to pay for employees’ retirement (maximize
owner compensation)?
3. Reduce taxes?
4. Share profits with employees without sharing ownership?
5. Encourage employee ownership?
6. Personal goals
(insert your personal goals)?

COMPENSATION AND BENEFITS EVOLVE
AS THE BUSINESS GROWS
Compensation and benefits often develop on an as needed
basis to fill specific requirements during the development of a
business. Many companies start with basic pay and benefits,


Compensation and Benefits Evolve as the Business Grows

3

Table 1.1 Examples of Benefits
Basic Benefits
Medical and dental insurance
Vacation and holidays
Sick leave and unpaid personal leave
Business expense reimbursement (car, travel)
Additional Benefits

Flexible hours, work from home

Free turkey at Thanksgiving


4

What Are You Trying to Accomplish?

“BE CAREFUL WHAT YOU ASK FOR”
There is an old saying: “Be careful what you ask for—because
you may get it.” Employees respond to incentives, so it is important to align your incentives with the company goals. If the
two do not match, you will not get the desired results. Poorly
designed incentive compensation can backfire and be counterproductive, whereas rewarding excellent performance with
well-designed incentive compensation can create a prosperous business environment (see Table 1.3).

FOR A CURRENT TAX DEDUCTION,
YOU NEED A “QUALIFIED PLAN”
To get a tax deduction for contributing funds to a “qualified
plan,” you must comply with strict rules for including employees and limiting contributions. Examples of qualified plans include 401(k), SEP (Simplified Employee Pensions), SIMPLE
(Savings Incentive Match Plans for Employees), and ESOP (Employee Stock Ownership Plans). In addition, there are investment options and differences between defined-benefit (DB) and
defined-contribution (DC) plans (see Table 1.4).

Table 1.3 Incentive and
Deferred Compensation Plans
Commission and bonus plans
Profit sharing
Stock options (qualified and nonqualified)



Nonqualified plans that enhance retirement benefits can be
powerful tools to attract and retain key employees. “Forfeiture” provisions (also called “golden handcuffs”) encourage
employees to stay with their present employer instead of leaving to work for a competitor.


6

What Are You Trying to Accomplish?
Table 1.5 Nonqualified Plans
(No Current Tax Deduction)
Supplemental Executive Retirement Plans (SERP)

Excess benefit plans

Split dollar plans


LOOK AT THE BIG PICTURE BEFORE
DIVING INTO THE SPECIFICS
It is important to step back and reassess what you are trying to
accomplish before focusing on specifics. Incentives, deferred
compensation, and retirement planning are components of the
overall compensation plan for the company. Since compensation drives business performance, you need to align your compensation strategies with your business goals.

THE BEWILDERING ARRAY OF ALTERNATIVES
Evaluating the alternatives can be overwhelming for small
business owners who focus primarily on running the business.
Examining the options can be like getting lost in the “trees”
(details and issues) and losing sight of the “forest” (the business goals). Large corporations hire compensation experts to
perform analyses, design models, and create complex, multifaceted compensation programs. Most small business owners,

the alternatives, we will view them from the perspective of
easy and inexpensive to administer, to more complicated and
costly, to complex and expensive. This framework will help
you evaluate the pros and cons and make a choice that is a
good fit for your business (see Table 1.6).
If you already have a plan in place, changing is tricky. You
must carefully plan any changes and clearly communicate them
to motivate employee performance and achieve business results. Changes are disruptive and raise concerns with employees. To ensure a positive outcome, think about compensation in
a comprehensive manner. Do not just add a 401(k) plan without
looking at the overall picture.
So, step back and reassess what you are trying to accomplish
before tackling the specifics of the options. Filling out Worksheet 1.1 will pinpoint your long-term objectives and enable
you to make informed choices about the options available.
Different situations require different plans. Writing down
this information will make it easier to pull together a request
for proposals later. It will also help you avoid the following
common mistakes.


8

What Are You Trying to Accomplish?

W ORKSHEET 1.1
Company Background Information Worksheet
Name of Company

Address of Company

Employer Identification Number (EIN)

Affiliated Companies
(Is there common ownership of any other companies?)

How is the business doing?

Stable or increasing revenues?

Can you make a fixed annual commitment to fund a plan?

Do you need to determine plan contribution annually?