Learn the 'secret way' to reward top brass ? Business Management ...

As the owner of the business, you may feel that you deserve more retirement plan benefits than other employees. But tough nondiscrimination rules can work against you ? unless you?re clued in to one of the best-kept secrets in the tax law.

Strategy: Set up an ?integrated retirement plan.? This plan integrates your retirement plan contributions with Social Security tax payments to effectively reduce the amount your company must contribute on behalf of the rank-and-file.

As a result, the higher-paid employees in your company?like yourself?will be entitled to a larger piece of the pie.

Does it sound too good to be true? It?s not. An integrated retirement plan qualifies as ?permitted disparity? under a special tax law exception. The plan isn?t considered to be discriminatory even though only a select few or even only one employee may benefit from it.

Here?s the whole story: Employers are re??quired to pay their fair share of FICA tax?Soc??ial Security tax and Medicare tax?for each employee. (Employees must pay their own share, too.) For 2013, the employer?s share of Social Security tax is equal to 6.2% of wages up to a base amount of $113,700. The 1.45% Medicare tax applies to all wages.

With an integrated plan, the employer?s share of Social Security tax counts up to the ?integration level.? This means that the Social Security tax payments the employer makes are credited against the plan contributions it must make on behalf of employees. Once the combined contributions reach the integration level for each employee, the credit against Social Security tax contributions disappears.

Thus, there are two effective contribution rates for plan participants.

1. The ?minimum base contribution? rate for wages up to the integration level.
2. An ?excess contribution rate? for wages above it.

One catch: The maximum annual compen??sation that qualifies for this purpose in 2013 is limited to $255,000. This figure is indexed annually for inflation.

Watch out for ?top-heavy plans?

Also, be aware of special rules for ?top-heavy plans.? If more than 60% of the benefits go to ?key employees? as defined by the tax law, your company must make a minimum contribution of 3% that can?t be integrated with Social Security tax payments. ?

In other words, you can?t go hog wild in favor of the company?s highly paid employees, but they can still garner the bulk of the plan contributions.

Example: Say you earn $300,000 a year from your small business. Your company integrates its defined contribution profit-sharing plan with its Social Security tax payments. The base contribution to the plan equals 5% of each employee?s salary. When an employee?s salary exceeds the integration level, a 10% contribution kicks in.

Because your contribution for this purpose is limited to $255,000, your annual contribution for 2013 equals $19,815. Here?s the breakdown:

Minimum base contribution ($113,700 ? 5%): $5,685 + Excess contribution ($255,000 ? $113,700 ? 10%): $14,130 =? $19,815

In comparison, someone in your company earning $40,000 receives a contribution of only $2,000 ($40,000 ? 5%). Lower-paid employees don?t realize the benefit of the 10% contribution rate available to higher-paid employees.

Caution: Don?t go overboard with this technique. The excess contribution rate can?t be more than double the minimum base rate or 5.7% higher than the base rate.

Usually, employers use this technique in conjunction with a defined contribution plan, subject to all the applicable limits. Alternatively, you can use a defined benefit plan, but the calculations are even more complex than they are for defined contribution plans. You?ll need an actuary to do the grunt work.

Tip: Even if you?re integrating a defined contribution plan, let a tax pro handle the details. This is not a do-it-yourself proposition.

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