09/ 14/ 2004
by Kelle Cambell
Planning for retirement is a major concern for everyone, but the issue becomes rather complicated for small businesses with employees. On one hand, great retirement benefits attract and retain employees. On the other hand, small-business owners must control costs and also ensure that their resources and plan arrangements can provide adequately for their own retirement needs.
Here are three commonly-used plans for small-business owners and their employees:
Simplified Employee Pensions
An SEP is an individual retirement account established by a business. While you'll most likely complete an IRS form for each employee, you don't have to submit it to the federal government. However, your contributions are deductible and the money will grow tax-deferred.
Contribution amounts are not mandatory, and you can skip making a contribution. You can also delay making contributions for employees until they've worked for the business three of the last five years. In addition, you can exclude nonresident aliens who have not received U.S. source wages from you and union workers covered by a collective bargaining plan. Contributions for employees must be the lesser of 25 percent of their pay up to a set limit ($205,000 for 2004) or the stated maximum for the year ($41,000 for 2004). The same rules apply to you, though you'll calculate 25 percent of your net profit.
Employees have control over how the money is invested, can use the money at any time (though they'll have to pay a penalty if they withdraw it before age 59½) and take it with them when they leave.
SEPs can be set up after the end of your fiscal year, and you can deduct an SEP contribution for the previous year as long as you set up the account and make your contribution by the deadline for filing your tax return for that year, even if it's an extension.
SIMPLE (Savings Incentive Match Plan for Employees)
A SIMPLE may be structured as an IRA or as a 401(k) plan. You are eligible for both types if you employ less than 100 employees who each earned $5,000 or more in the previous year. You are also eligible for a SIMPLE-IRA if you have no other business retirement plan other than a collective bargaining plan (you can have individual plans like traditional IRAs).
Except for the completion of a form when the plan is implemented, there is no federal filing requirement for a SIMPLE-IRA, and your contributions are deductible. A SIMPLE-401(k) will have annual federal filing requirements.
For both plans, employees will contribute a portion of their salary up to a limit of $9,000 for 2004. You can match your employees' contributions, up to 3 percent of their individual salaries. That percentage can be lowered (but not below 1 percent) for any two years in a five-year period. Employees enjoy the same benefits as with the SEP-IRA.
You can also opt to simply contribute 2 percent of an employee's salary when it will be at least $5,000 for the year. This does not depend on whether your employee makes a contribution, and only $200,000 of the employee's compensation is taken into account when calculating your contribution limit.
Generally, you must set up a SIMPLE by Oct. 1 of the year for which you want to make a contribution, or if your business begins after Oct. 1, as soon as is administratively feasible.
Keogh PlansActual Keogh plans no longer exist, and the IRS now uses the term "qualified plan." However, "Keogh" is a convenient term for classifying a variety of plans:
- Profit-sharing plans such as 401(k) plans (some of the business profits are allocated among participating employees)
- Money purchase pension plans (contributions are a fixed percentage of participants' salaries regardless of whether the business was profitable)
- Defined benefits plans (contributions are based on requirements for providing what the Tax Code calls "definitely determinable benefits" to participants).
These plans must be in written form, and many have contributions held in custodial accounts or trusts. As the owner, you can't make a contribution if your business has a net loss although you may still have to contribute on behalf of your employees. Your Keogh payments are tax-deductible, are subject to certain limits and can be made up to the due date of your tax return, even if it's an extended deadline. Employees may be permitted to make non-deductible contributions.
It's a good idea to use a professional consultant to administer a Keogh plan to ensure that you're in compliance with all IRS requirements (e.g., no discrimination in favor of highly-compensated employees).
Banks can help you set up any of these plans, and you can also investigate possibilities with insurance companies, mutual funds or credit unions. For further details, order or download the IRS' Publication 560: Retirement Plans for Small Business from www.irs.gov.
