San Diego Business Journal

When it comes to qualified retirement plans, one size does not fit all growing companies.

Today, you can custom-design a qualified plan for your business. If you think retirement plans are too future-oriented to command attention during the years when you are preoccupied with building a successful business, think again: custom-designed retirement plans can provide both current and future benefits.

The fact is, outside the business itself, retirement plans can offer the single most advantageous ways to help business owners and employees build assets on a tax-deferred basis. They can also boost growth by helping attract quality employees and rewarding long-term employment.

In many cases, the economics of a retirement plan make it more advantageous to set up a plan than to continue without one.

Available benefits include:

o Tax-deductible contributions;

o Tax-deferred accumulation of funds;

o Tax-advantaged treatment of distributions from the plan.

(Distributions are subject to income tax and may be subject to a 10 percent penalty if withdrawn prior to age 59 1/2.)

- Three-Step Process In Selecting A Plan

The first step in selecting a qualified retirement plan is defining what you want the plan to accomplish. Is the key objective to establish an income tax deduction for the employer? Is the goal to channel as much money as possible to the principals and selected key employees? Or are you most interested in attracting and retaining qualified and talented employees?

Once you have established your objectives, the next step is to decide how much money the company will contribute to the plan. Remember, however, there are limitations on contributions. Ask: How much can the company afford? Can the company expect to make the same contributions to the plan every year? Or would it prefer the option to change contributions annually, basing them on business performance?

With these questions answered, you will want to spend a little time thinking about the future. When will you retire? Have you accumulated retirement assets through an individual retirement account or other accumulation vehicle? How many employees work for your company? What are their ages and their length of employment? When will they be retiring?

The answers to all of these questions will help influence your selection as you select from the following plan categories:

o 401(k) plans are extremely popular retirement plans with small- and medium-sized companies. Generally funded both by the company and the employee, a 401(k) plan allows employers to make tax-deductible contributions and permit employees to make pre-tax contributions , up to certain limits.

- Employees Involved In Planning Process

The beauty of a 401(k) plan is that it involves employees in the retirement planning process by enabling them to save before-tax dollars and by offering choices of funding vehicles.

Because of high administrative costs and regulations, these plans are generally most effective for businesses with 25 employees or more.

o Profit-sharing plans offer the advantage of allowing for flexible contributions , made on a tax-deductible basis , that can vary year by year from 0 percent to 15 percent of the total payroll for all plan participants.

Once contributions are made, they are usually spread among the participants according to a formula based on pay levels.

However, an effective customization technique, known as "Social Security integration," may allow for contributions to be allocated in a way that permits business owners to steer a higher percentage of the benefits to themselves and key employees because of their higher compensation.

Profit-sharing plans generally favor younger business owners and managers.

However, "age-based" profit-sharing plans allocate contributions based on pay and age, thus skewing the contribution further in favor of comparatively older employers or key employees.

The largest annual allocation that can be made for any individual participant in a profit-sharing plan is 25 percent of pay to a maximum of $30,000.

- Tax-Deductible Contributions Allowed

o Money purchase plans permit a tax-deductible contribution of up to 25 percent of the total payroll of all plan participants.

However, unlike profit-sharing plans, the contribution amount to money purchase plans is fixed, usually expressed as a percentage of participating payroll, and is required each year. Money purchase plans also can be integrated with Social Security to skew the contribution in favor of the business owner and other highly compensated employees.

The largest annual allocation that can be made for an individual participant in a money purchase plan, or any combination of defined contribution plans, is 25 percent of pay to a maximum of $30,000.

For employers who want to maximize their contribution potential but minimize their commitment, the combination of a money purchase plan and profit-sharing plan may be suitable.

For example, an owner-employee earning $160,000 , the maximum allowed by law for qualified plan purposes in 1998 , may only get a $24,000 maximum contribution from a conventional profit-sharing plan (15 percent of $160,000).

However, the employer could adopt a 3.75 percent money purchase plan and a profit-sharing plan. In a lean year the contribution could be as small as the money purchase plan's required 3.75 percent or $6,000, but in better years the contribution could be increased to the $30,000 maximum.

- Formula Indicates Benefit At Retirement

o Defined benefit plans provide for a specific benefit at retirement, which may be up to 100 percent of pay to a maximum annual sum , $130,000 per year as of 1998. A defined benefit formula indicates the benefit to be paid at retirement. Each year, an actuarial calculation is done to determine the required contribution amount to fund for the future benefit.

Because defined benefit plans have limitations relative to the benefit and not contributions, there is no limit to what may be contributed to a defined benefit plan each year as long as the amount has been determined by the actuary in accordance with IRS rules as necessary to fund for the future benefit. Therefore, defined benefit plans offer potentially the largest income tax deductions of all qualified plans.

Defined benefit plan contributions are required and employers should be sure they can handle the commitment.

Defined benefit plans are generally more advantageous for employers aged 50 or older, those who are closer to retirement and can benefit from the large contributions and the rapid accumulation of a retirement benefit.

o Target benefit plans can be considered hybrids, combining some of the features of money purchase plans with some of the features of defined benefit plans. As with money purchase plans, contributions are fixed and may be as high as 25 percent of the total pay of all plan participants.

Target benefit plans are also similar to defined benefit plans in that they establish a "target" retirement benefit based on current salary, and that amount is funded based on interest rate assumptions and age.

However, unlike defined benefit plans, target benefit plan assumptions are not revised or updated annually. Target benefit plans have lost some of their appeal compared with the newer, age-based profit-sharing plans, which provide more flexibility.

- Choosing A Custom Plan

Once you have selected the ideal qualified retirement plan, you can customize your choice to meet specific objectives.

For example, to offer employees an incentive to stay with your company, your 401(k) plan might have a one-year waiting period before employees can enroll. Or your age-based profit-sharing plan might reward your highest-performing, highest-paid salesperson or executive with a high allocation, while also allowing you as the business owner to gain the maximum allocation. And profit-sharing plans can offer added flexibility such as the ability to arrange for loans, hardship withdrawals, and distribution prior to retirement.

As you can see, companies no longer have to pick qualified retirement plans off the shelf. Even small businesses can custom design qualified plans to meet their specific needs. Today, the first question is not "What type of qualified plan should I have?" But "What do I want the qualified plan to do?"

That's where the great benefit of custom retirement planning comes into play.

Review all the options with a benefits professional.

Howells is a financial professional with MONY Life Insurance Co. based in New York City. He works in the Orange, Calif., office and has been with MONY for more than 15 years.