NFIB

Retirement Plans: Choosing From the Alphabet Soup
12/ 04/ 2002

by Karen M. Kroll

With sales to make, employees to lead and a bottom line to protect, staying on top of retirement plans can fall by the wayside. In fact, less than half of small business owners say they're very knowledgeable about retirement accounts, according to a recent survey by Nationwide Financial, an asset management firm in Columbus, Ohio.

Though setting up a retirement plan is not something to take lightly, it can be easier and less expensive than it appears. What's more, some plans allow employers to vary their annual contributions. Here is a brief rundown of several plans geared to businesses with between one and several-hundred employees.

Simplified Employee Pension (SEP): SEPs usually work best in businesses with several employees, as the employer makes all contributions, although the annual amount can change. For 2003, the contribution can be up to 25 percent of an employee's compensation, with a maximum of $40,000.

Phil Lange, CPA and head of Lange Management LLC, established SEP accounts for himself and his three employees. He can contribute fairly hefty amounts to the accounts – a benefit his employees appreciate. "They view it as having a lot of value," says Lange, whose firm is located in Towson, Md.

One drawback: Because the business owner makes all contributions, SEP plans get pricey as businesses grow. "It's hard to scale up," says Seth Miller, president and chief executive officer with Miller Systems, a Boston-based IT services company. Miller Systems offered its original half-dozen employees a SEP plan, then switched to a 401(k) once its employee roster hit double digits.

Savings Incentive Match for Employees (SIMPLE) IRA: These are available only to firms with less than 100 employees, but are most popular among sole proprietorships and companies with just a few employees.

With SIMPLE plans, employees can sock away up to $8,000 for 2003; those over the age of 50 can go up to $9,000. Employer contributions are mandatory and max out at 2 percent of eligible employees' pay, whether or not they contribute. Or employers can choose to match up to 3 percent of pay only for employees who participate ($9,000 for those over 50). Contributions to participants vest immediately.

401(k): A 401(k) is a profit-sharing program in which employees contribute to their own retirement accounts. For 2003, participants can defer up to $12,000, or $14,000 if they're 50 or older. Together, the employer's and employee's contributions can't exceed $40,000, or 100 percent of an employee's pay.

The plans are a little more complex than SEP or SIMPLE plans. A third party usually administers and tests the plan to ensure it doesn't favor certain employees. At Fairytale Brownies, a Chandler, Ariz.-based baker, 17 of the firm's 35 full-time employees participate in a 401(k) plan. Yearly administrative costs run between $2,000 and $3,000, says co-founder David Kravetz.

401(k) plans are most common among companies with more than 25 employees. "As you get larger, you have to have some parity with larger organizations to recruit people," says Seth Miller of Miller Systems.

401(k) Safe Harbor: This version of the 401(k) is named for the provision which provides a safe harbor from annual discrimination testing. To ensure that a plan is exempt from such testing, the employer must contribute either 3 percent of all eligible employees' pay, or match 100 percent of employees' contributions up to 3 percent, plus 50 percent of contributions between 3 and 5 percent.

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This article originally appeared in the December/January 2003 issue of MyBusiness magazine.

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