A Plan for Jonathan

A Plan for Jonathan

FIN/422

A Plan for Jonathan

There are many pros and cons to running a small business, with one of the most important aspects being a long-lasting financial plan. This is important because it can help keep the business productive, as well as, motivate the employees to stay loyal to the company. Jonathan’s business is ran by family, but even with this in mind, it is crucial that the choices he makes for the business is going to be in line with what any business owner should do to provide for the employees. He needs to take time to evaluate different retirement plans to ensure he finds the best one to meet the needs of himself and his employees. It would also be a good idea for Jonathan to get assistance from a financial advisor to help with better understanding the choices that are available and better understand the tax implications.

While there are many things to consider, it is very important that Jonathan keeps in mind the main reason for looking into these different types of plans is for the employees. Even though they are family members, it’s crucial that Jonathan have an open line of communication to hear their feedback on the type of benefits they are looking for, how much they can afford to pay, and how often such benefits would be used. Jonathan must look at if the choices offer competition for other small businesses thus creating encouragement for his employees to stay, will there be internal tax benefits, will there be any impacts on the beneficiaries, and what are the administrative costs. He needs to ensure that he is finding a plan that will be reasonable and within budget for him to maintain a benefit plan.

There are a few key concepts that Jonathan must explore carefully to ensure the retirement options will be effective. Most business owners are used to handling difficult situations and a great deal of responsibility, as these are the people responsible for creating a business budget and also evaluating what has and needs to be spent for the business. This is similar in the situation of retirement benefit planning. For the small family business that Jonathan runs, the best options are as follows:

Simplified Employee Pension (SEP) – With this plan, contributions are made to IRA’s that are favorable to the employee tax wise. There is minimal disclosures or tax reporting on these accounts.

401K – A cash contribution plan that is a cash or deferred arrangement. A portion of the employee’s salary is deposited to this account pretax up to a certain percentage.

Profit Sharing / Stock Bonus – This is a contribution plan where the employer specifies the amount that will be put into the plan.

It would be beneficial for Jonathan to opt for the SEP plan, as this is where he would benefit the most. Some aspects that need to be followed to get this plan started are:

The employees need to be paid at least minimum earnings to benefit or participate.

Jonathan must create an individual IRA for each employee that chooses to participate.

The employees have to direct payment to the plan.

Jonathan would decide the percentage that the business would contribute on behalf of the employee.

Employees are able to opt to take the account when they go, if they choose to leave the company and reinvest this elsewhere.

Since this is a small business with less than 100 employees, this plan offers an incentive for both the employer and the employees.

The SEP plan seems to be the most cost efficient for Jonathan when it comes to spending. He can choose to pay more when the profits of the company increases, while also having the ability to pay out less if there is a bad year. One of the downsides to this type of plan is that if Jonathan chooses to expand the business, he would likely have to change the plan because of tax implications and fees that would then likely be charged. Jonathan would also have to prepare for higher out of pocket costs, if the company was to expand to more than 100 employees. With this plan, employees are unable to contribute and there are no catch up options for those employees who are older than 50.

In conclusion, we can see that there are some decisions that Jonathan must make. Jonathan, of course, wants the best thing for his employees, as these are also his family members, but he has to make sure the decision is going to also be beneficial for himself and his business. It would also be a good idea that Jonathan have a backup plan in place for if he ever chooses to expand the business or outgrows the plan he selects. Having a backup plan would be beneficial to ensure Jonathan is prepared for any additional expenses that may take place if he needed to change plans in the future.

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