Cash: The Employer's Burden;

 

With the reduction in individual tax rates, many business owners are feeling pressure to simplify their compensation systems by scaling back deferred savings programs in favor of current cash. For conscientious employers, however, the decision is not easy, raising -- as it does -- questions about long-term responsibilities to employees.

Consider the case of Ted Lyons, president of H.T. Lyons Inc., a $10-million to $12-million mechanical-contracting company in Bethlehem, Pa. For the past five years, the company has provided its 20-odd office and management people with a compensation package placing strong emphasis on retirement saving. (The company has a separate pay and pension plan for about 100 unionized employees.) The package includes a profit-sharing plan, into which the company generally puts about 5% of an employee's base salary each year, and a 401(k), where it matches half of an employee's personal contribution up to 2% of base salary. Participation in the latter is close to 100%. "I really talk it up," says Lyons.

Tax reform, however, has raised questions about the system -- particularly the profit-sharing part of it, since employees can't tap their tax-deferred money, without penalty, until retirement. Now that individual tax rates are falling, some of the company's top people, who earn between $40,000 and $60,000 per year including bonus, have told Lyons they would rather have profit sharing in the form of current cash.

That has put Lyons on the horns of a dilemma. On the one hand, he would like to give employees what they want. But he was troubled by the prospect of long-time employees getting ready to retire and finding that they have no savings. "That would be a real problem," he says.

Nevertheless, he finally agreed to give employees a choice in the way they receive their bonuses -- but only after he was satisfied that people were adequately covered for the future by their profit sharing. "They can shelter the money," says Lyons, "or take the money and run. Either way, they'll have some money put aside that they won't be able to touch."