Small-business people face big pension-equalizing job

People who own small businesses often complain about the amount of government-related paper work they have to wade through. Well, now they have some more to handle. The self-employed and some free-lancers may also have more pencil pushing to do.

Thanks to the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), hundreds of thousands of small-business owners and self-employed people will have to make major changes in their retirement plans. The new rules became effective Jan. 1, but changes can be made anytime this year, or until 1984 taxes are filed.

Some people will have to scrap their retirement plans entirely and start over; some will have to find ways to add lower-level employees to existing plans; others will find they can now put aside substantially more for retirement.

In making the changes, Congress seemed to be stressing the ''equity'' portion of the law's title. The aim was to give unincorporated businesses most of the tax advantages offered by qualified retirement plans. Before, these tax advantages were only available to employees of incorporated businesses.

Also, the changes put new restrictions on so-called ''top heavy'' plans that end up benefiting key personnel and leaving lower-level workers without adequate pensions. Such plans now have to meet minimum contribution and benefit formulas and give accelerated vesting schedules for non-key employees.

Apart from this, specific pension changes in TEFRA call for:

* Reduced dollar limits on benefits in defined-benefit plans (where the size of pension payments is fixed before retirement) from $136,425 to $90,000 per worker per year.

* Reduced dollar limits on contributions to defined-contribution plans (where the worker has a choice of retirement plan investment options), from a maximum of $45,475 to $30,000 per worker per year.

* Increased allowable contributions to a qualified plan for self-employed and unincorporated businesses from a maximum of $15,000 to $30,000.

For the self-employed or those earning substantial free-lance income, this last change will be a boon, if they can afford to set aside the additional money. Previously, people who wanted to put aside more than the $15,000 had to incorporate themselves.

Now, the self-employed ''need not incorporate to set up a pension plan,'' says Ira M. Lewis, vice-president and manager of the corporate-services department at Merrill Lynch & Co. ''That person ought to look at what he would like to do for himself, look at how much he wants to shelter.''

Either the self-employed can go with upgraded Keogh plans, Mr. Lewis suggests , or, if they want to shelter even more money, they can set up a defined-benefit plan. This option was not available to unincorporated businesses before. ''For the self-employed, the world is their oyster,'' he added.

The TEFRA provisions that deal with ''top heavy'' plans are mainly aimed at professionals like doctors, lawyers, and architects with small firms. Often, they have set up retirement plans that benefit the professionals far more than the secretaries, clerks, nurses. ''In a top-heavy (retirement) plan, more than 60 percent of the benefits favor the owners of the business,'' explained James Ballard, a senior consultant with Coopers & Lybrand, the accounting firm.

Two things are likely to happen in these situations, Mr. Ballard says. The plans will be revised to include all employees in the firm, or else they will be terminated altogether. If they're terminated, the professionals will then set up plans to take care of themselves and leave out lower-paid employees. Thus, an attempt to correct one problem may end up creating another, even though the first problem may not have been so big.

''TEFRA took a sledgehammer to a problem the size of a pea,'' Merrill Lynch's Mr. Lewis commented.

For employees in this situation, then, the first solution is an individual retirement account. IRAs should be used by almost everyone who can have them, but especially by those without a retirement savings plan. You might also look into annuities, either the flexible-premium or single-premium variety. You won't get the tax credits on deposits that come with an IRA, but like an IRA, interest builds up tax-free until it is withdrawn, usually at retirement.

And if your employer does not already have one, you might be able to persuade him to sponsor a 401(k) salary reduction plan. This can be done at little cost to the employer, and you can either make pretax contributions to it, or, if you already put in the maximum, make aftertax deposits. These will also earn tax-free interest.

Money fund 'return'

I have $5,000 I would like to invest in a money market mutual fund. What kind of return can I expect? D.P.

To get an exact return, you will have to invest in a Treasury bill, or a certificate of deposit at a bank. Money funds pay yields based on the constantly changing yields of the money market certificates - CDs, government notes, short-term corporate loans - in their portfolios. These are fairly close to current interest rates. In recent weeks, rates have ranged between 8 and 10 percent, depending on the fund.

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