Every restaurant operator would like to reward loyal employees by offering a retirement plan as a benefit. And, of course, every restaurateur is interested in cutting his or her taxes and socking away money for a comfy future. Unfortunately, setting up a retirement plan that won't tax your bottom line can be a tricky business — especially for smaller companies.

But with some careful planning, you and your employees can both sock away money in a pension plan that gives everyone maximum benefits.

The pension-plan puzzle

Obviously, restaurateurs set up retirement plans to help employees save money and to save money themselves. The problem is that making a commitment to sponsor a company pension plan has usually meant investing a big chunk of company money and management time, especially at smaller firms. "The two big barriers for little companies are cost and complexity," says Ted Benna, whose company, The 401(k) Association in Langhorne, Pennsylvania, specializes in stripped-down retirement plans for small companies.

Many restaurant companies have had two additional strikes against them when it comes to setting up retirement plans: pension laws that penalized family businesses and rules that effectively penalized firms with a diverse work force of part-time and full-time employees.

The pension landscape in 1997 is looking better for restaurants, however. Congress has opened up new avenues for retirement plans and cleared away the roadblocks from some older plans.

"The number of retirement-plan choices is confusing, but the situation has gotten better for small-business owners," says tax expert Kenn Tacchino, a professor at Widener University in Chester, Pennsylvania, who has studied the new retirement-plan options in depth. Even the popular but complicated 401(k) plan should become more appetizing in 1999, when a new series of "safe harbors" that will make it easier for the highly compensated (which, in this case, would be the restaurant owner) to put away a maximum contribution is expected to go into effect.

Here are three highlights of the new laws that small-business owners might find particularly beneficial.

1. Family-owned companies takenote: The family-aggregation rules have been repealed. This little-noticed provision (buried in last year's Small Business Jobs Protection Act) is the single biggest piece of pension news affecting family-owned restaurant companies. Family-owned firms can finally offer retirement plans to all family members who work in the business, because the so-called "family aggregation" rules have been repealed.

Until the repeal went into effect on January 1, 1997, the family-aggregation rules had limited the amount family members related to the business owner could contribute to a qualified retirement plan, such as a 401(k) plan or profit-sharing plan. If you had a father/son combination or a husband-and-wife team, the second family member was often out of luck when it came to a pension, says a spokesperson at the federal government's Pension Benefit Guaranty Corporation (PBGC) in Washington DC.

For instance, in a husband-and-wife restaurant business in which the husband/owner earned $150,000 and the wife earned $60,000, the old rules judged the wife's salary to be over the compensation limit for one family and thus ineligible for figuring retirement-plan contributions, leaving the wife without any benefits at all, according to the PBGC. As of January 1 of this year, each family member is considered separately and gets his or her own plan account.

In sum, this legal change can drastically boost the value of a retirement plan for some family firms, effectively sheltering additional tens of thousands of dollars of family income from taxes. If you've rejected a retirement-plan option such as a 401(k) plan or profit-sharing plan in the past because it didn't seem cost-effective, ask your financial adviser to run the numbers for you again. The repeal of the family-aggregation rules may make the plan more attractive now.

The biggest winners under these new rules may be women in foodservice, says Joan Vines, national director of employee-benefits tax services at the accounting firm Grant Thornton LLP in Washington DC. Because most founding entrepreneurs in past decades were men, it has often been the wives who worked beside them who went without pensions. "It was often the female who would get hurt," says Vines. Now, the women behind — and beside — the men get their fair share of the future, too.

2. Congress has created a new type of retirement plan for small companies known as a SIMPLE-IRA plan. Congress established an entirely new category of retirement plan last year and named it — for better or for worse — the SIMPLE plan. SIMPLE is a contrived acronym that stands for Savings Incentive Match Plan for Employees. However, the name doesn't necessarily describe the nature of setting up and maintaining such a plan.

The SIMPLE plans are available only to businesses with 100 or fewer employees. Under the rules for those new plans, eligible employees (including the business owner) can agree to have as much as $6,000 annually deferred from paychecks and diverted into an account at a brokerage firm, mutual-fund house, bank or insurance company. The employer must match such employee deferrals up to 3 percent of that person's pay (or else make a contribution equal to 2 percent of salary to every employee).

Right there you have the most distinguishing characteristic of a SIMPLE-IRA plan — the fact that an annual match is required from employers. So, if a restaurant manager earning $25,000 a year opts to contribute $750 a year to his own SIMPLE-IRA account, for example, the restaurant owner must also kick in $750 to the manager's account as a match. "Most small businesses don't like the government telling them to do something, and with SIMPLE [plans] the match is mandatory," says pension attorney Jeffrey Kahn of Kahn, Waxman & Taub, which has offices in Boca Raton, Florida, and New York City.

How much might the mandated match of a SIMPLE-IRA cost your company? If you have 50 employees earning an average salary of $25,000 and 60 percent of them choose to participate, your annual 3 percent employer match would cost the company $22,500. (Your restaurant might have a much lower rate of participation among employees, of course, thereby costing your company less.) Fortunately, to give the business owner some flexibility, the SIMPLE-IRA rules allow the employer match to dip to 1 percent in two of any five years.

How does the SIMPLE-IRA shake out as a personal tax shelter for the boss? If you are looking to shelter large amounts of your own income, it may be inadequate. You can put a maximum of only $6,000 a year into the plan, and that amount is matched by the company dollar for dollar up to 3 percent of pay for a total annual maximum of $12,000 (for an operator earning $200,000).

One major benefit of the SIMPLE-IRA plan is that you don't have to worry about your plan being judged "top heavy" (that is, benefiting only the top brass) by the IRS, and you don't need a certain level of participation from the rank-and-file before you, the owner, can participate, as you do with other retirement plans, such as a traditional 401(k). Therefore, a SIMPLE-IRA plan might be attractive to a restaurant owner with many part-time or young workers who may not choose to participate in a retirement plan.

Another welcome difference about SIMPLE plans, compared with other options, is that your company will save on administrative costs, because SIMPLEs don't require you to hire attorneys and actuaries to conduct "nondiscrimination" tests. (Actuaries use such tests to compare the rate of retirement-plan participation among highly paid workers with that of the lower paid to ensure that your plan is not tilted in favor of the highly paid.) Congress has done away with such requirements in the case of SIMPLEs. "For companies that want to avoid burdensome tests and keep administrative costs as low as possible, it's an attractive option," says Merrill Lynch's Bill Stanton, group manager of small-market retirement plans.

And what about the responsibility for investing the plan money? That's up to the employees. "The employer makes his contribution to the employee's SIMPLE-IRA account and then washes his hands of the matter," notes Tacchino. SIMPLEs do have reduced administrative duties, recordkeeping and fees compared with traditional retirement plans, but they also have some serious limitations, which means that — rather than serving as a cure-all plan for small-business pension concerns — SIMPLEs merely take their place alongside other retirement-plan options that may be appropriate for your restaurant company.

3. Congress passed another version of the SIMPLE plan, known as the SIMPLE 401(k) plan — but most companies can reject it. In a confusing twist, Congress created a plan similar to the one described above but known as a SIMPLE 401(k). "I do not see the SIMPLE 401(k) setting the world on fire," says tax expert Tacchino. "In fact, very few people in the country would do the SIMPLE 401(k)." Why? Because the new SIMPLE 401(k) seems to have many disadvantages (such as more recordkeeping and no flexibility on employer matching contributions) and few advantages (the availability of loans) when compared with the SIMPLE-IRA.

Many financial-services companies do not even plan to offer the SIMPLE 401(k) as an option. If your company wants the features of a 401(k) plan, you can opt for a full-blown traditional 401(k) plan, which is still available.

Ponder plan possibilities

The wider array of retirement-plan options now available to small businesses means restaurant operators should spend even more time investigating the choices before settling on a program. There is no one plan that's right for every restaurant. The best pension plan for you depends on your company's size, cash flow, tax situation and personal retirement needs.

A business with wide swings in profitability might find a profit-sharing plan ideal. This type of plan's strength is that the company can elect to make a discretionary employer contribution at year's end, when you know whether or not you've had a good year.

For an older restaurant owner looking to put away a lot of money in a hurry, a defined-benefit plan allows the largest amount of annual pay to be sheltered from taxes — although such plans are complicated and expensive to implement. Says pension attorney Kahn, "A defined-benefit plan is not for someone who says, "Keep my life simple.' "

The traditional 401(k) plan is the fastest-growing type of retirement plan. Some 24 million Americans have a 401(k) account, according to Access Research of Windsor, Connecticut. But for a 401(k) plan to work well, your company must be large enough (generally more than 20 employees), and employees must be interested in participating. "The plan won't work well, and the business owner can't put in the maximum contribution, unless people participate," explains consultant Brian Schaefer of 401(k) Ventures in Palo Alto, California.

For a tiny bakery or foodservice company — with perhaps only five or so employees — a Keogh plan or a Simplified Employee Pension (SEP) plan might allow a greater tax benefit to the owner than a SIMPLE plan and be easier to set up and administer.

The new SIMPLE plan, which doesn't mandate employee participation, might be a perfect fit for a restaurant with a young work force. Restaurateur David Foecke, co-owner of the Seattle vegetarian restaurant Cafe Flora, has been researching SIMPLE plans and is considering starting one. "We'd like to offer a plan as an employee benefit and an educational tool to get our employees to start thinking about planning ahead," says Foecke.

The restaurant already offers a rich benefits package: full medical coverage for full-time employees (half coverage for part-time workers), two to three weeks' vacation for full-timers, sick leave and "gain sharing" bonuses based on the restaurant's results. Foecke partly credits the benefits package with driving down employee turnover at Cafe Flora to about half the restaurant-industry average.

Foecke had looked at SEP retirement plans in the past, but they required that half or more of eligible employees participate. "It's a daunting task in a restaurant to get 50 percent of mostly young employees to care about retirement," says Foecke. But adding a new SIMPLE-IRA plan to the Cafe Flora benefits menu allows interested employees (such as full-time managers) to put away up to $6,000 a year for retirement regardless of whether other employees (such as part-time servers) choose to participate. "One could set up such a plan even if only one employee is interested," says Foecke.

Foecke does worry about the annual expense of the SIMPLE-IRA's required match, since the five-year-old restaurant has "not been profitable that long yet." But he appreciates the provision that would allow the employer match to dip to as low as 1 percent in any two out of five years.

Invest some time in research

Once you've determined your individual business needs, it's time to examine the marketplace. The above discussion only scratches the surface of your retirement-plan options; there are many types of retirement plans other than those already mentioned.

Since a restaurateur's specialty is serving fine food, not determining financial strategy, it's wise to seek some professional guidance. Your first phone call should be to someone other than a salesperson who sells retirement plans. Call your accountant or a trusted independent financial adviser to get some straight answers on what a retirement plan would mean for your company and your personal tax situation. You want to talk to someone who can explain the obligations and pitfalls of starting a plan and the advantages and disadvantages of different kinds of plans, not someone who'll just describe the pension products that are for sale. Take the advice of pension attorney Jeffrey Kahn, whose law firm grapples with the legal problems of business owners with poorly executed pension plans: "These plans should be designed by a professional, not just sold by a marketer."

When you're ready to start a particular type of plan, shop around for the best plan provider, because that provider will be your financial partner for years to come. Stockbrokers, mutual-fund houses, insurance companies, banks — they'll all be glad to take your company's retirement money. But who will skillfully administer your plan and answer your detailed questions in years to come? Many service providers will offer to administer your plan for no cost or a low cost as a come-on to get your investment money, but be sure your provider is serious about compliance with federal pension rules and will consider your retirement-plan needs as carefully as you do.

Maximize the benefits of your new benefit

Adding a retirement plan to your restaurant company's benefits package can help you save on personal taxes, make your retirement more financially secure, and attract and retain employees. "You're doing your employees a favor by helping them save for retirement and avoid taxes," says tax expert Tacchino. But be sure to educate yourself and do your homework before entering into this financial obligation. Failure to choose the right plan and provider can complicate your life or even become a legal headache. All those dollars you're struggling to save for down the road could get lost in legal hassles along the way.

With careful personal planning and sound professional advice, restaurant operators can create retirement plans that will guarantee a brighter future for their employees without jeopardizing their own nest egg.

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