Expanding Employee Offerings Can Benefit Small Businesses

Some small business owners provide their employees—and themselves—with scant company benefits. Many of these small business owners may believe that company benefits beyond the basics—health and disability insurance, IRAs and perhaps a 401(k) plan—may be too expensive, particularly for small firms. 
 
At the same time, many of these small business owners spend substantial sums out of their own pockets--rather than out of corporate coffers--for benefits for themselves, including long-term care insurance, life insurance and various tax-deferred investments.

Not only can these businesses afford to provide these benefits on a company level, many of them can’t afford not to. Instituting expanded company benefits can result in substantial cost and tax savings for small business owners over paying for them as individuals. In this sense, small business owners who make this transition successfully can be said to bridge the gap between their personal and company finances. 
 
Providing expanded corporate benefits also enables small business owners to give their employees greater total compensation value at a savings over giving the same value in wages alone. By doing so, companies can increase their economic capacity to attract, retain and motivate valued employees.

 Untapped savings may also await companies that already provide a wide array of benefits. The structure of company benefit programs and the quality of their administration—particularly regarding tax planning—can make a substantial difference in their real economic cost.

 Businesses seeking to get the lowest tax bills for small business owners and the greatest value for themselves and for their compensation dollars should consider.

 1) Starting a defined benefit plan (often referred to as a pension). These plans promise to pay each participating employee a specified amount upon retirement, contingent on a set number of years of service. Investment in these plans, which comes from employees or the employer, is tax-deferred, lowering participants’ annual pre-tax income while assuring savings for retirement.

 Though some small business owners may have profit-sharing plans and 401(k) plans (known as a defined contribution plans), they may be contributing the maximum allowable amounts into these plans each year. By adding a defined benefit plan, they can reap substantial additional tax-savings and increase their retirement nest eggs.

 2) Long-term care insurance. The ordinary conception is that these plans aren’t feasible for small companies. However, if handled correctly, these plans can give small businesses the same kind of tax benefits that larger companies enjoy. With as few as three people, a company can qualify for a long-term care plan. With only 10, the underwriting of these policies becomes far easier. Many small business owners tend to have these plans for themselves as individuals, but not through their companies. By setting these plans up at work, they can incur additional tax savings. Employees may take these plans with them when they leave the business and continue to pay the same group rate—much as they do with COBRA concerning their health plans. While this is hardly a retention tool, it encourages employee participation and increases the odds of reaching enrollment minimums.

 3) Company life insurance. Not only can small companies offer life plans, they also have the option of having these plans purchased under their defined benefit plans, which can confer additional tax savings. 
 
4) The need for proactive administration of benefit plans coupled with strategic tax planning, both for small business owners’ individual returns and their businesses’. Commonly, small businesses don’t comprehensively manage their benefit plans, so they may be missing opportunities for tax efficiency. The idea is to be proactive rather than reactive. This means running the actuarial numbers throughout the year so as to position overall tax strategy. For small business owners’ individual returns, this might mean tax-harvesting losses on stocks or creating trusts. Waiting until the end of the year to develop a strategy, by contrast, is reactive. By then, it’s too late to make strategic changes to effect the most advantageous tax position.

 5) The need for advisory specialists. Like many busy professionals, small business owners may be looking for a one-size-fits-all advisor. After all, this reduces the number of people they deal with. However, this approach doesn’t always result in the best service, and thus ultimately doesn’t save time when things need to be re-examined and redone. Instead, small business owners should consider the benefits of using a network of advisors that can assign specialists where needed. This is best done after an initial evaluation of the needs of individual small business owners’ personal and professional financial situations.