06/ 26/ 2006
by Kay Bell
Now that your business is booming, it's time to think about retirement. No, we're not talking about your last days running your company, but rather setting up a retirement plan for your business.
A retirement benefit can help you attract and retain employees. It also provides tax savings for both your company and workers. Most importantly, it offers you and your staff a good way to build a nest egg.
Here are some highlights of four retirement plans that work well for small businesses.
SEP-IRA
The Simplified Employee Pension, commonly referred to as a SEP or SEP-IRA, is widely used because it is easy to establish and maintain.
An employer contributes to a traditional individual retirement account set up by or for each eligible employee. The employee owns and controls the IRA, but does not put any money into the account.
Your company's maximum contribution is based on net earnings and is limited to 20 percent of self-employment income or 25 percent of employee compensation. You also are limited by a statutorily set dollar amount, indexed annually for inflation. The 2006 limit is $44,000.
You must make the same percentage contribution for each eligible employee. However, you do not have to participate each year, so you can skip contributions for a year your business did not do particularly well.
SIMPLE IRA
One of the easier plans to establish and maintain, a SIMPLE IRA is an acronym for Savings Incentive Match Plan for Employees and includes contributions made directly to each eligible employee's IRA.
A business with 100 or fewer employees can establish this type of plan.
A worker is eligible for a SIMPLE IRA if he or she earned $5,000 in any two previous calendar years and expects to make that much the year the plan is established. You can set up less restrictive requirements (e.g., if your salary structure is less, you can lower the earnings amount), but you cannot set more restrictive eligibility guidelines.
Employees can contribute to the plan. As employer, you can match employee contributions (up to 3 percent) or to make non-elective contributions (up to 2 percent) to employee accounts, regardless of whether workers contribute.
401(k)
These are familiar to anyone who has worked for a large company. But many smaller businesses also find that 401(k)s are an appropriate retirement option.
A 401(k) program is a good benefit for companies with a mix of rank-and-file employees and owners/managers. It also offers participants a wider range of investment options. New in 2006, you can set up the plan so that workers can designate some or all of their contributions as after-tax Roth investments, making eventual distribution of such money tax-free.
Both company and employee contributions are allowed. As employer, you can contribute on behalf of all participants, match a portion of your employees' contributions or do both.
Of course, the greater benefits and options of a 401(k) plan mean more work for employers: creating a written plan, setting up a trust fund for plan assets, record keeping, keeping workers informed. Because of these and other administrative requirements, companies usually contract with an outside firm to handle some or all of the of a 401(k) plan's operational aspects.
Companies with 100 or fewer employees have the option of establishing a SIMPLE 401(k), which follows many of SIMPLE IRA guidelines. Individual 401(k) plans, sometimes called Solo(k)s, also are available to sole proprietors.
Profit sharing
As the name indicates, this plan allows you to share your company's success with your workers.
You don't need to provide a definite formula for figuring out the profits to be shared. Your annual company contribution also is discretionary. However, you must make systematic and substantial contributions to the plan.
You also must provide a precise calculation for allocating the contribution amount to the plan's participants, as well as for distributing it when employees meet plan guidelines.
Since there is no one model for a profit-sharing plan, you'll probably want help from a pension specialist to set up and maintain this benefit.
General retirement plan benefits
Each of these retirement plans offers tax benefits to both your business and your workers.
In plans where employee contributions are allowed, they are made pre-tax, meaning your workers will get an immediate tax break, and no taxes are collected on the plan money until the worker makes withdrawals.
On the company tax side, employer contributions are deductible. Also, small businesses may be able to claim a tax credit for part of the ordinary and necessary costs of starting a retirement plans.
If it's time for your company to think about retirement plans, you can find expert help from financial institutions, investment companies, insurance agencies and other pension specialty firms in determining which of these plans is best for your company, and how you can establish one of them.
