Wednesday, November 23, 2011

Small Business Taxes

Importance of Protecting and Promoting Small Business Qualified Retirement Plans - Retirement Plan Contributions to 401(k)/Profit Sharing Plans Should Not Be Cut Back

          The deduction for retirement plan contributions is not a tax expenditure, only a tax deferral

            In the discussion on how to raise revenue (and possibly lower tax rates), the deduction for retirement plan contributions has been treated the same as other tax expenditures in the tax code.  This is a mischaracterization - retirement plan contributions are eventually brought into income, along with any earnings.  The only loss to the government with respect to the deduction for retirement plan contributions and tax free growth inside the plan is the time value of money.  But the potential detrimental impact on savings by Americans due to a reduction on contributions to retirement plans could be huge.

A recent study prepared for the American Society of Pension Professionals & Actuaries (ASPPA)[1]  quantifies the “real” cost of this so-called tax expenditure.  This study reflects the value of the retirement plan tax expenditure to be roughly 55 – 75% lower than estimates by the Joint Committee and the Treasury. This study assumes that people will enjoy lower income tax rates during retirement than when contributions are made to the retirement plan.  This assumption increases the value of the “tax expenditure.”  Many experts believe, however, that tax rates are going to be higher for most taxpayers in the future because the tax rates are at historic lows and because of our country’s desperate need for revenue.  Thus, some experts believe the “real” cost of the retirement plan tax expenditure is even lower than that set forth in the ASPPA report.

There are 670,000 private-sector defined contribution plans covering 67 million participants and over 48,000 private-sector defined benefit plans covering 19 million participants. The U.S. private retirement plan system paid out over $3.824 trillion in benefits from 2000 through 2009 and U.S. public sector plans paid out $2.651 trillion during the same period.  All of this money was brought into income and subject to regular income tax rates (the only exception would be money that was contributed on an after-tax basis).

In the upcoming debate on deficit reduction, the retirement plan system should not be used to generate revenues, particularly when the savings are illusory due to artificial budget time frames which ignore reality.

          Impairing Americans’ ability to save for retirement now could be devastating for their retirement security in the future

Longer life expectancies are requiring increased retirement savings. Additional health expenses will be incurred by these increasingly elderly retirees. The present qualified retirement plan system has been very successful in providing retirement security. To protect the retirement security of small business employees, the small business voluntary retirement plan system must be promoted.  It is essential that the current contribution limits be maintained and not reduced.  Congress should do everything possible to encourage the adoption of 401(k), profit sharing, defined benefit or cash balance plans by small businesses.  Contribution limits on SIMPLE or other IRA based plans should not be increased, however, since these plans allow easy withdrawal access to IRA owners  prior to retirement and provide neither ERISA safeguards nor preselection of prudent investment choices or investment education.  They are good starter plans and should be used to draw small businesses into the qualified retirement plan system. Data shows that the most effective way for people to save is through payroll deduction.  Employees are far more likely to save in a 401(k) plan than in any other vehicle, including an IRA.

          The tax incentives inherent in the retirement plan system are the primary motivation for small business owners to sponsor retirement plans and thus cannot be cut back without imperiling the system.  If the tax advantages are cut back at a time when income tax rates are reduced (particularly when combined with favorable capital gains and dividend rates), small business owners will be incentivized to freeze or terminate the company’s retirement plan. Most small business owners view the meaningful contributions that are made for the non-key employees as the price of admission to be able to save for retirement in a tax advantaged manner for the key employees. From time to time, economists, particularly those who work with or for the government, claim that if the small business did not sponsor the retirement plan, the small business owners would pay the employees their regular compensation plus the amount that would have gone into the retirement plan for them.  These economists would say that this is true because this is the real value of the employee to the small business.  These economists are clearly not small business owners.  When a small business closes down the retirement plan, the owners are not likely to increase the pay of the non-key employees to take into account the loss of the plan contribution, rather the owners will take the amount that would have been contributed to the non-key employees as additional compensation for themselves, or take this money and reinvest it in the company. The early 1980s demonstrated that the small business retirement plan system is largely dependent upon tax incentives.  Because of the onslaught of laws that occurred at that time which decreased benefits for the key employees and increased contributions for non-keys while increasing administrative burdens, small business owners determined that the costs outweighed the benefits to be derived  for the key employees.  Accordingly, existing plans were terminated in droves and new plans were not established.  We don’t have to guess what will happen if the tax incentives are removed from the underpinning of the small business qualified retirement plan system – all we have to do is look back to the 1980s to see what will happen. A small business will go through a cost-benefit analysis to determine whether to sponsor a qualified retirement plan.

          How  many employees are actually covered by the qualified retirement plan system?   Many knowledgeable people believe the qualified retirement plan system covers about 50% of employees. A recent study,[2] which used actual data from W-2s rather than relying upon employees’ responses, found 77 % of all employees who work in companies with 10 or more employees are offered a retirement plan and of these employees, 62% made 401(k) contributions.  What was startling is that when asked only 49% of these employees thought they were contributing.   [This means that 13% of all employees making 401(k) contributions through payroll deduction didn’t even remember that they were making these contributions!]  Note that this survey did not analyze the actual numbers for retirement plan contributions made by the employer because this data is not reported on the W-2.  One has to assume this number would be even greater than the 77% number because many employees who receive employer contributions cannot afford or choose not to make 401(k) contributions and many small businesses offer profit sharing plans without a 401(k) feature.  If an employee can’t remember that he or she reduced his/her take home pay to make a contribution into a retirement plan, it is even more likely that this employee forgot that the employer was making a contribution to the plan on his/her behalf.

The size of the company makes a significant difference.  W-2 data, which is accurate only to 401(k) plans, reflects that 46% of small businesses with more than 10 employees but less than 25 offer a retirement plan.  The same data reflects that 60% of small businesses which employ 25 employees but less than 50 offer a retirement plan. 70% of small businesses which employ 50 employees but less than 100 offer a retirement plan.  84% of businesses with more than 100 employees offer a retirement plan. There is no further breakdown given for over 100 employees so we don’t know how many small to mid-size businesses – often defined as up to 500 employees offer plans compared to the large businesses. 

However, only 34% of small businesses which employ fewer than 10 employees offer a retirement plan.  The data, however does not take into account that in the first 4 years of a company’s existence, 40% of all new start ups fail.  One would assume that most start ups fall in the under 10 employee group.  It is not surprising, then that there is a lower level of sponsorship of retirement plans for the under 10 employee group when taking into account the precarious nature of most “new” small businesses.  

Nevertheless, these numbers reflect that the small business retirement plan system is successful by any measure as far as delivering benefits for small business employees.  Further, most small business plans are adopted by the small business to provide a tax advantaged way for the owners to save for their and the other key employees’ retirement.  The rules with respect to retirement plans force the owners to make significant contributions for the non-highly compensated employees.  Thus, in the small business qualified retirement plan world it is not unusual for the company (not the employee) to make contributions for its employees in the 3 – 8.5% of compensation range. 

This data also ignores the fact that not all employees meet the retirement plan eligibility requirements.  Part-time employees, employees under age 21 and transient employees are generally not eligible to participate in a retirement plan.  The statistics cited for the low retirement plan coverage, however, most often include the entire workforce and do not differentiate between the entire workforce and that percentage of the workforce that is actually eligible to participate in a retirement plan. When these ineligible employees are excluded, the coverage numbers again improve quite dramatically.

A qualified retirement plan, whether small or large, creates significant rights for the plan participants and generates significant costs for the company. Funds in a retirement plan are not tax sheltered, rather they are tax deferred until the participants receive them, at which time they are brought into the participant's gross income.  Those who specialize in the small business retirement plan area know that those plans which benefit the owners of small businesses also provide significant benefits for the non-highly compensated employees.

[1] Xanthopoulos and Schmitt, Retirement Savings and Tax Expenditure Estimates, ASPPA May, 2011 
[2] Dushi, Iams and Lichtenstein, Social Security Bulletin, Vol. 71 No.2 2011,  Assessment of Retirement Plan Coverage by Firm Size, Using W-2 Tax Records

Tuesday, September 27, 2011

SBCA 2012 Meeting and Proxy Voting Form

SBCA Members please find the 2012 Annual Meeting/Dinner Notice below as well as a proxy voting form. 


SBCA Annual Meeting/Dinner

Saturday and Sunday, February 18 and 19, 2012

Saturday 4 p.m. to 8:30 p.m.

Sunday 7:30 a.m. to 10 a.m.


Hilton San Diego Bayfront

1 Park Boulevard
San Diego, CA  92101
Phone:  (619-564-3333


         I will attend the SBCA Annual Meeting beginning on Saturday, February 18, 2012 from 4 p.m. to 8:30 p.m. and continuing on Sunday, February 19, 2012 from 7:30 a.m. to 10 a.m. 

            Cost $190.00 per person includes all meeting materials, dinner buffet on Saturday and continental breakfast on Sunday.






         I cannot attend the SBCA Annual Meeting.  Please complete and return this form along with the attached Proxy.

Please make checks payable to:          SBCA


Return no later than January 20, 2012 to:


                                                Mrs. Leanne H. Redstone

                                                Small Business Council of America

                                                1523 Concord Pike, Suite 300

                                                Brandywine East

                                                Wilmington, DE 19803

NOTE:            If you are NOT attending the SBCA Annual Meeting (beginning on Saturday, February 18, 2012, at the Hilton San Diego Bayfront, 1 Park Boulevard, San Diego, CA 92101), please return this Proxy to Leanne Redstone, Executive Director, SBCA, 1523 Concord Pike, Suite 300, Brandywine East, Wilmington, DE 19803.




                        KNOW ALL MEN BY THESE PRESENTS, that the undersigned member of the Small Business Council of America (the "Corporation"), does hereby nominate, constitute and appoint, Alson R. Martin/Paula Calimafde/Peter J. Shanley, his/her true and lawful attorney, agent and proxy, for and in the name, place and stead of the undersigned, the vote at the Annual meeting of the Members thereof to be held at the Hilton San Diego Bayfront, 1 Park Boulevard, San Diego, CA 92101 beginning on Saturday, February 18, 2012 at 4:00 p.m., and at any meeting held pursuant to an adjournment or postponement thereof, to elect the Board of Directors of the Corporation.

                        Dated at ______________________, this ______ day of _______________, ____.


                                                                                                (Print Name)



Tuesday, June 28, 2011

Just Updated: Health Care Reform Bill in a Nutshell

Please find an updated version of our free and helpful Health Care Reform Bill Summary entitled "Health Reform in a Nutshell".

Friday, May 6, 2011

SBCA Awards

The Small Business Council of America (SBCA), a national nonprofit organization which represents the interests of more than 20,000 privately-held and family-owned organizations on Federal tax, employee benefit and health care matters, presented its 28th Annual Congressional Awards at a reception at the US Capitol on May 4th, 2011.

Tuesday, April 19, 2011

SBCA 2011 Top Legislative Priorities

The SBCA members present at the SBCA 2011 Annual Meeting adopted the following priorities for 2011:

Protect and Strengthen Retirement Plans; Preserve Small Business Tax Benefits

Longer life expectancies have given rise to a need for increased retirement savings. The present system has been remarkably successful in providing retirement security. It is critical that the small business voluntary retirement plan system be promoted. The SBCA supports maintaining current contribution limits and encouraging the use of 401(k), profit sharing, defined benefit or cash balance plans. Contribution limits on the Simple or other IRA based plans should not be increased since these plans allow easy withdrawal access to IRA owners while providing neither ERISA safeguards, preselection of prudent investment choices nor investment education. The system needs to be freed up from required annual amendments and multiple notices that do little, if anything, to improve the system for plan participants.

In the upcoming debate on deficit reduction, the retirement plan system should not be used to generate revenues. The SBCA is committed to assisting Congress in simplifying the retirement plan laws which are too complex. These laws can be simplified without undoing the valid policy concerns underlying the law and the tax incentives inherent in the system which are the primary motivation for small business owners to sponsor these plans.

Other small business tax benefits should not be abolished while those for bigger businesses are preserved.

SBCA Goal - Preserve, strengthen and simplify the voluntary small business retirement plan system as well as other valuable small business tax benefits.

Repeal 409A for Small Businesses

It may not be an understatement that 99% of small business know nothing whatsoever about Section 409A. 409A is a trap for the unwary in the small business context while serving no valid policy purpose that can justify the cost of complying with this complex and unnecessary law. 409A was intended to halt the abuse of management removing huge sums of money through non-qualified deferred compensation plans to the detriment of the stockholders of companies like Enron and WorldCom. Because management and ownership are basically identical in the small business context, there is no abuse in the small business world. 409A prevents common sense economic arrangements that are sensible for the employees and small businesses and pose no opportunity for abuse. The vast majority of small businesses have no idea that their employees could be subject to huge penalties on money that these employees could very well never receive nor even be entitled to receive due to future events. Response on this issue has been difficult to obtain because almost no one understands it enough to complain to members of Congress.

SBCA Goal - Repeal 409A for small business to rid them of unnecessary burdens and unfair penalties.

Estate Tax Certainty

For 2011 and 2012, estates below $5 million pay no estate taxes, those with assets over $5 million pay 35% on the assets above the $5 million threshold. The gift tax and Generation Skipping (GST) exemptions are also $5 million. There is a new "portability" provision that allows the second spouse’s estate to take advantage of any exemption (i.e., $5 million) that was not used in the 1st spouses’ estate. This law is set to expire in 2013 at which time the estate and gift tax exemptions are scheduled to drop to $1 million (the GST will be in the $1.3 million range) and the tax rate will jump up to 55%. The portability provisions will be eliminated.

Consensus – Estate taxes cannot be made into an extender item. Proper estate planning requires certainty in the law. The present status with a prospective drop to $1,000,000 exemption is creating havoc and wasteful legal and other planning expense.

SBCA Goal – Have the 2011 – 2012 law extended permanently. Keep the exemption level from dropping to the $1 million level – work to keep it as high as possible.

Fix Health Care Reform

The SBCA is committed to ensuring that small business owners and employees are able to access quality health care without having the government design and/or take over their health care plans. To this end, the SBCA will work with Congress, by providing its significant expertise in the health care small business market. The cost shifting from the government to the private sector and in particular, small business, needs to be remedied. The discrimination tests imposed on small businesses should either be eliminated or

postponed at least until the exchange system is in place. Small businesses lack the buying power of big business and government, so they are forced to pay more to cover their employees. The "Cadillac" tax applies to expensive health insurance, but it is unfair to apply it to small businesses, which aren’t overbuying, but are just being overcharged because they have less negotiating levererage. The "Cadillac" tax needs to be either repealed or not be applicable to smaller businesses.

Needed modifications should not be put off. To avoid an impending "brain drain," it is important that we act quickly so that we retain our high quality medical care and specialists throughout the country, as well as advances in medical knowledge, technology and new treatments and cures.

SBCA Goal – Work with Congress to improve the health care law.

Cafeteria Plans

Level the playing field between large and small entities by allowing small business owners to participate in cafeteria plans. Due to a narrow IRS interpretation of the word "employee" (for purposes of cafeteria plans only), the vast majority of small business owners are not eligible to participate in cafeteria plans. Only owners of C corporations or less than 2% owners of S corporations are allowed to participate. This change also has to be made to the new SIMPLE cafeteria plan law - a law designed for small businesses to make it easier to sponsor cafeteria plans. Unfortunately, the essential step of allowing owners to participate was not included in the new law! Thus, the SIMPLE cafeteria plan is really only available to small businesses that operate as C corporations. In the last decade, this has been the least favorite choice of entity for small businesses.

Further, in an effort to promote individuals to save for long-term care (rather than relying on the government to foot the bill), long-term care insurance should be made a qualified benefit under a cafeteria plan. Currently cafeteria plans can allow employees to select life, disability, health care, vision, dental and supplemental insurance on a pre-tax basis. Only long-term care is not allowed (most likely because the cafeteria plan law was in place prior to the long term care insurance market). Shifting more of the cost of long-term care from the government to individuals willing to save is fiscally responsible, both for those individuals, and for the government.

SBCA Goal - Allow all small business owners to be eligible to participate in cafeteria plans. Allow long-term care insurance to be a qualified benefit in a cafeteria plan

Need for Certainty, Stability and Fairness in the Tax Law

SBCA says death to patches, sunsets, overly complex and unfair laws - particularly those that are used by IRS primarily against small businesses. Strict liability statutes should be eliminated and taxpayers should have the right to access the U.S. Tax Court before the

IRS can collect taxes or penalties. SBCA is greatly concerned about the erosion of due process in the small business tax context.

SBCA goal - Educate the Congress on the pressing need for certainty and stability in the tax laws. Protect small businesses against abusive tax laws and ensure that they can all receive their day in court, not just those who can afford to pay all taxes and penalties first.

Repeal New 1099 Filing Requirements


Since the SBCA identified this as a top priority, this issue has been properly resolved.

These priorities were selected by approximately 60 board and advisory board members from across the country. Each member was given an opportunity to explain issues that were affecting small and privately owned businesses in the tax, employee benefits and health care areas. New ideas that would assist small businesses were discussed. After discussion on all of the ideas and issues, the group voted on our top 7 priorities. Most of our board and advisory board members are expert advisors to small businesses and most represent hundreds to thousands of businesses in their particular area of expertise – accounting, law, insurance, plan administration, actuarial or employee benefits consulting. Many are part of major firms or associations in the country which represent tens of thousands, if not more, small businesses. The reach and knowledge of our board members is staggering.

The SBCA has expanded issue papers on all of these topics and would be pleased to send them to you. Please e-mail to obtain the papers you would like.