Read Start Your Own Business Online
Authors: Inc The Staff of Entrepreneur Media
Start Your Own Business (62 page)
Associations aren’t the only route to take. In some states, business owners or groups have set up health insurance networks among businesses that have nothing in common but their size and their location. Check with your local chamber of commerce to find out about such programs in your area.
Some people have been ripped off by unscrupulous organizations supposedly peddling “group” insurance plans at prices 20 to 40 percent below the going rate. The problem: These plans don’t pay all policyholders’ claims because they’re not backed by sufficient cash reserves. Such plans often have lofty-sounding names that suggest a larger association of small employers.
How to protect yourself from a scam? Here are some tips:
•
Compare prices.
If it sounds too good to be true, it probably is. Ask for references from other companies that have bought from the plan. How quick was the insurer in paying claims? How long has the reference dealt with the insurer? If it’s less than a few months, that’s not a good sign.
•
Check the plan’s underwriter.
The underwriter is the actual insurer. Many scam plans claim to be administrators for underwriters that really have nothing to do with them. Call the underwriter’s headquarters and the insurance department of the state in which it’s registered to see if it is really affiliated with the plan. To check the underwriter’s integrity, ask your state’s insurance department for its “A.M. Best” rating, which grades companies according to their ability to pay claims. Also ask for its “claims-paying ability rating,” which is monitored by services like Standard & Poor’s. If the company is too new to be rated, be wary.WARNINGBeware the practice of “cherry picking.” Health insurance carriers often woo companies with young, healthy employees away from their existing policies by promising substantially lower rates. All too often, however, those rates rise dramatically after the first year. Sticking with one carrier rather than renegotiating your health insurance coverage every year saves time and effort. In the end, that’s money, too.
•
Make sure the company follows state regulations.
Does the company claim it’s exempt? Check with your state’s insurance department.
•
Ask the agent or administrator to show you what his or her commission, advance or administrative cost structure is.
Overly generous commissions can be a tip-off; some scam operations pay agents up to 500 percent commission.
•
Get help.
Ask other business owners if they have dealt with the company. Contact the Better Business Bureau to see if there are any outstanding complaints. If you think you’re dealing with a questionable company, contact your state insurance department or your nearest Labor Department Office of Investigations.
A big mistake some business owners make is thinking they can’t fund a retirement plan and put profits back into the business. But fewer than half the employees at small companies participate in retirement plans. And companies that do offer this benefit report increased employee retention and happier, more efficient workers. Also, don’t forget about yourself: Many business owners are at risk of having insufficient funds saved for retirement.
To encourage more businesses to launch retirement plans, the Credit for the Small Employer Pension Plan provides a tax credit for costs associated with starting a retirement plan. According to Jeffrey S. Kahn, an employee benefits attorney with Greenberg Traurig in Boca Raton, Florida, you must follow four rules to be eligible for the credit.
1. The plan must be a qualified retirement plan, such as pension, profit sharing, stock bonus or qualified annuity plan; e.g., a 401(k), Simplified Employee Pension (SEP) plan, or SIMPLE.
2. Employers with 100 or fewer employees who received at least $5,000 in compensation for the preceding year are eligible. Part-time employees must be considered part of this group.
3. The plan cannot just be for an owner/employee. It must also cover at least one nonhighly compensated employee, who makes $110,000 or less a year and is not an owner of the company.
4. The employer is not allowed to have sponsored a pension plan during the three years preceding the new plan’s start date.
The credit is a maximum of $500 in the year the plan starts and $500 in each of the next two years, assuming at least $1,000 of expenses are incurred in both years. Expenses cannot be lumped together.
For more information, see IRS Form 8881,
Credit for Small Employer Pension Plan Start-Up Costs
.
Credit for Small Employer Pension Plan Start-Up Costs
.
AHA!IRS Publication 560,
Retirement Plans for Small Business
, describes rules for SEP, SIMPLE and other qualified plans. It’s free; visit
irs.gov
or call (800) TAX-FORM.
Don’t ignore the value of investing early. If, starting at age 35, you invested $3,000 each year with a 14 percent annual return, you would have an annual retirement income of nearly $60,000 at age 65. But $5,000 invested at the same rate of return beginning at age 45 only results in $30,700 in annual retirement income. The benefit of retirement plans is that savings grow tax-free until you withdraw the funds—typically at age 59. If you withdraw funds before that age, the withdrawn amount is fully taxable and also subject to a 10 percent penalty. The value of tax-free investing over time means it’s best to start right away, even if you start with small increments.
Besides the long-term benefit of providing for your future, setting up a retirement plan also has an immediate payoff—cutting your taxes.
Here is a closer look at a range of retirement plans for yourself and your employees.
Individual Retirement Account (IRA)An IRA is a tax-qualified retirement savings plan available to anyone who works and/or the person’s spouse, whether the individual is an employee or a self-employed person. One of the biggest advantages of these plans is that the earnings on your IRA grow on a taxdeferred basis until you start withdrawing the funds. Whether your contribution to an IRA is deductible will depend on your income level and whether you’re covered by another retirement plan at work.
Kahn of Greenberg Traurig says you can’t contribute to a traditional IRA after age 70½, and you must begin distributions by April 1 following the year you reach age 70½. There also is a 10 percent penalty for funds withdrawn (with limited exceptions) before age 59.
You also may want to consider a Roth IRA. While contributions are not tax-deductible, withdrawals you make at retirement will not be taxed. The contribution limit in 2010 for both single and joint filers was $5,000 per person or $6,000 for individuals aged 50 and older. After that, contributions are indexed to inflation.
According to Kahn, a single person may contribute to a Roth IRA with an adjusted gross income (AGI) of under $95,000, with benefits phasing out completely at $110,000. For married couples filing jointly, contributions are possible with an AGI less than $150,000, with benefits being eliminated at $160,000. These limitations are also adjusted periodically.
The hot topic for 2010 was the Roth conversion. Prior to January 1, 2010, a taxpayer could not convert a regular IRA to a Roth IRA if his or her modified AGI exceeded $100,000. In addition, married taxpayers had to file a joint return to qualify. Kahn adds that the $100,000 limit has now been removed, and married taxpayers no longer need to file a joint return to qualify.
Furthermore, if the taxpayer elects, he or she does not need to include the IRA conversion income in 2010; instead, the taxpayer can pick up 50 percent in 2011 and 50 percent in 2012, which may result in some tax savings. Consult your tax lawyer or accountant to see if this option is right for you.
e-FYIWant to know how you’re doing on your retirement savings plan? Check out CNN Money’s online retirement planning calculators at
cgi.money.cnn.com/tools
. They provide an easy, accurate way to help you determine how much you’ll need and what your chances are of getting there. And if it looks like you’ll fall short, suggestions are provided for improving your plan. Best part—it’s free!
There’s also a retirement savings option known as a Roth 401(k) to consider. It is a 401(k) plan that allows employees to designate all or part of their elective deferrals as qualified Roth 401(k) contributions. Qualified Roth 401(k) contributions are made on an after-tax basis, just like Roth IRA contributions. Employees’ contributions and earnings are free from federal income tax when plan distributions are taken. Unless extended, this option will expire at the end of 2011.
Regardless of income level, Kahn says you can qualify for a deductible IRA as long as you do not participate in an employer-sponsored retirement plan, such as a 401(k). If you are in an employer plan, you can qualify for a deductible IRA if you meet the income requirements. Keep in mind that it’s possible to set up or make annual contributions to an IRA any time you want up to the date your federal income tax return is due for that year, not including extensions. The contribution amounts for deductible IRAs are the same as for Roth IRAs.
For joint filers, even if one spouse is covered by a retirement plan, the spouse who is not covered by a plan may make a deductible IRA contribution if the couple’s adjusted gross income is $167,000 or less. Like the Roth IRA, the amount you can deduct is decreased in stages above that income level and is eliminated entirely for couples with incomes over $177,000. Nonworking spouses and their working partners can contribute up to $10,000 to IRAs ($5,000 each), provided the working spouse earns at least $10,000. It’s possible to contribute an additional $1,000 for each spouse who is at least 50 years old at the end of the year, as long as there is the necessary earned income. For example, two spouses over 50 could contribute a total of $12,000 if there is at least $12,000 of earned income.
As you can see, the rules concerning IRA and Roth IRAs are quite complex and can change from year to year. Be sure to consult with a qualified professional to make sure you are in compliance.
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