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Complicated Pension Rules Hamper Firms benefit Plans Small companies hope to benefit from pending fed legislation

By Laurie Joan Aron

Artemis Capital, a young investment banking firm, decided that offering a retirement plan to its 35 employees was critical to attracting and retaining the talent it needed. But developing a package that worked meant complying with complex Internal Revenue Service rules and making the right choice from among numerous pension and investment advisory servies.

While Artemis Capital Group succeeded in setting up a retirement plan, most small companies do not. Only one-quarter of fulltimers at firms with 100 or fewer emplovees have retirement benefits, as compared with three-quarters at larger firms, says the U.S. Small Business Administration.

Rules Stacked Against Firms

Current rules on benefits make it difficult for small firms with several highly compensated employees to offer the kinds of plans that would be standard at similar, bigger companies. The more two-tiered the salary structure - that is, the more a firm's salaries tend to be just high and low, with few in the middle - the harder it is. The combined effect is to put smaller firms at a disadvantage in recruiting top talent.

But small companies stand to gain from pending federal legislation that will streamline pension regulations. The new law will exempt firms of fewer than 100 employees from rules that prevent companies from offering a plan with tax advantages to one group of employees but not another. It will raise the cap on annual contributions. With Republicans, Democrats and President Clinton putting their own plans on the table, some form relief is likely.

There are two basic types of retirement plans: qualified, which keeps money safe from taxes until after retirement, and non-qualified, which does not. While the latter can be offered selectively, tax-advantaged plans must be offered to all employees, and that's where the headaches start.

"What the top guy can put away is dependent on what the guy in the mail room can put away," explains Joseph Unger, a tax partner with the Manhattan accounting firm M.R. Weiser & Co.

Because of the restriction, highly compensated employees may not be able to contribute enough to their retirement plan to be meaningfull. "That's a real sore point for highly compensated people in smaller firms," says kevin McCabe, defined contribution manager for pension consultant Hirschfeld Stern Moyer & Ross Cos. in Manhattan.

To offer a qualified plan, like a 401(k) or a defined contribution or defined benefit plan, requires business owners to do a complex cost-benefit analysis that starts with some goal-setting.

If a company owner's goal is to get the largest tax deduction for himself or herself, offering a retirement plan for all employees is probably not the way to go. That's because annual contributions to 401(k) plans are now capped at just over $9,000 and based on a top salary of $150,000.

Some firms beef up participation in 401(k) plans by matching employee contributions. Look carefully, Mr. Unger says, at "the amount of money that goes toward the owner's retirement vs. the amount the owner has to give away plus the intangible benefit of providing for thc staff.

Finding right match

Small businesses still have to contend with a complex and time-consuming shopping process for plan administrators and vendors of investment products.

Carol James, an Artemis Capital vice president, initiated a major search for a firm to set up and administer a 401(k) plan. She had representatives of 18 pension administrators make presentations. She then drew up a matrix of her questions and their answcrs about cost, their experience working with small business, the investment vendors they worked with and the options they offered, and employees' flexibility in changing investment choices or in getting loans.

Finally, Ms. James evaluated the records of investment products offered, and polled employees on their preferred level of investment risk and their willingness to bear front-end costs of certain funds.

In the end, she chose a plan administered by Geller Group, a Manhattan law and accounting firm, for $3,500 annually. "It's a nice selling point (to potential employees)," she says, "and a way to keep people with the firm."