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Owners: Start hoarding retirement plan funds

by on
in Employee Benefits Program,Hiring,Human Resources

As the owner or sole proprietor of a small business, you reap most of the rewards. But you also run most, if not all, of the risks. So you might be hesitant to sponsor a qualified retirement plan for yourself and your employees. One reason: Creditors could gain access to your plan assets if the business ever goes under.

Strategy: Set up a qualified retirement plan, worry-free. A new U.S. Supreme Court ruling tears down a key barrier to your ability to sponsor a qualified plan.

The ruling, which settled a split opinion in the lower courts, extends so-called ERISA rights and protections to working owners of small businesses. As a result, the assets in your qualified retirement plan become off-limits to creditors.

Besides socking away more money for retirement (within the generous tax-law limits), a qualified plan will help your company retain key employees who might otherwise be looking for greener pastures. It's a win/win situation.

New incentive to sponsor retirement plans

The important Supreme Court case involved a physician, but the basic principle applies to any working owner who wears dual hats as an employer and an employee. (Yates v. Hendon, 541 U.S., 2004)

Now, the Supreme Court has reversed the 6th Circuit's decision. It ruled that working business owners are entitled to all ERISA benefits, including protection of retirement accounts from creditors.

One potential stumbling block: To earn this important ERISA protection, your retirement plan must cover at least one employee (besides your spouse). Plans that cover only sole owners or partners and their spouses are not covered under ERISA.

Work around the obstacles

Solution: If you don't have any other employees, you can work around this requirement by hiring your adult child or other relative to help you out in the business and participate in the qualified retirement plan. This arrangement would entitle you to the legal protections offered by ERISA.

Final note: For 2004, the maximum amount you can contribute to a profit-sharing plan is $41,000 or 25 percent of your compensation, whichever is lower. Your business can fully deduct your contributions.

Online resources: ERISA

To find more details about complying with ERISA, visit these Web sites:


• U.S. Labor Department, www.dol.gov/dol/topic/health-plans/erisa.htm.

• U.S. Labor Department's Employee Benefits Security Administration's compliance assistance page, www.dol.gov/ebsa/compliance_assistance.html.

• The ERISA Industry Committee, www.eric.org.

• BenefitsLink, where you can read the actual law, at www.benefitslink.com/erisa/crossreference.html.

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