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Article added or updated:
03/30/2008 |
Small Business Retirement Plans
|
Related Articles:
Roth IRA Advantages
Roth IRA Basics
Roth IRA FAQ
401k Retirement Plans
Self Employed 401k
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FINDING IT HARD to hire
employees for your small business? Maybe the problem is your retirement
plan. If it stinks, or you don't have one at all, savvy employees are
unlikely to want to work for you.
So, where do you start? Here is a
rundown of your retirement plan options based on 2004 requirements. The
best plan will vary depending upon your needs.
Simplified
Employee Pension Plan (SEP IRA)
If you have just a handful of employees and are looking for a plan that
is truly low cost and low maintenance, then consider a SEP IRA. The plan
is funded with tax-deductible employer contributions, and you must cover
all eligible employees. Employee contributions are not allowed.
With a SEP there is no "plan document,"
and you don't need to file annual reports with the IRS. Contributions
can vary from year to year. So if you hit a lean spell, you aren't
locked in.
|
SEP IRA |
|
|
Employers |
Employee |
|
Eligibility |
Any business owner or
self-employed individual. |
All employees who have worked for
you for three of the past five years and who earned at least
$450 from you last year. |
|
Contribution Limits |
25% of compensation (if you're an
employee of your own corporation) up to $41,000; 20% of
self-employment income (if self-employed) up to $41,000. |
Employees cannot contribute. But
the employer must contribute to eligible employee accounts the
same salary percentage she contributes to her own. |
|
Vesting |
Immediate. |
Immediate. |
|
Pros |
Contributions do not have to be
made every year. Very easy and cheap to set up and administer. |
Vesting is immediate. |
|
Cons |
Must cover all qualifying
employees. Employees cannot contribute. Vesting is immediate. |
Employees cannot contribute. |
Savings
Incentive Match Plan for Employees (SIMPLE IRA)
SIMPLE IRAs are good for your employees. They allow employee
contributions. And, they mandate an employer match. Trouble is, a
SIMPLE IRA won't let you sock away as much for yourself. For 2004,
annual contributions are generally limited to $9,000 ($10,500 if you
are 50 or older as of 12/31/04) plus an employer matching
contribution (up to 3% of your salary).
"If you have a
business with less
than 10 people, then a SIMPLE IRA is a great way to get started,"
says David Wray, president of the Profit Sharing/
401(k) Council.
Whatever you do, don't get the
SIMPLE IRA confused with its similar but flawed cousin, the SIMPLE
401(k) . This retirement option is like a traditional
401(k) except
it typically has higher fees and less flexibility. "When we studied
this option, we could not come up with a scenario where this would
make sense to use," says Jeanette LeBlanc, marketing manager at T.
Rowe Price1.
|
SIMPLE IRA |
|
|
Employers |
Employee |
|
Eligibility |
Employers with 100 employees or
less who do not maintain any other retirement plan. |
All employees who have ever earned
more than $5,000 in any two years prior and who will earn at
least $5,000 this year. |
|
Contribution Limits |
3% employer match (in certain
situations, the match can be 1% to 2%) or 2% nonelective
contribution for all employees up to $4,100 per employee. |
$9,000 plus employer match up to
3%. (Employer can contribute $9,000 plus match to her own
account.) Additional $1,500 if you are age 50 or older as of
12/31/04. |
|
Vesting |
Immediate. |
Immediate. |
|
Pros |
Employees can make contributions.
If you have lower salary (or self-employment income), you can
make larger contributions than under other types of plans. |
Employees can make contributions. |
|
Cons |
Employer most likely cannot
contribute as much as she can to a SEP IRA. Match is mandatory.
Vesting is immediate. |
None really, unless you have a
high salary that would permit larger contributions under other
types of plans. |
Profit Sharing
Plans
As you might imagine, a profit sharing plan gives you a slice of
your company's profits. Annual contributions are made to your
account, but because they are based on your company's performance,
they'll likely vary from year to year.
|
Profit Sharing |
|
|
Employers |
Employee |
|
Eligibility |
Any business owner or
self-employed individual. |
Employees who worked at least
1,000 hours in past year; two years, if no vesting period. |
|
Contribution Limits |
25% of salary (20% of
self-employment income) up to $41,000. |
Employees cannot contribute. |
|
Vesting |
Determined by employer. |
Determined by employer. |
|
Pros |
Contributions can vary from year
to year. |
|
|
Cons |
Administration usually requires
hiring a pro. |
Employees cannot contribute.
Vesting takes time in most plans. |
401(k)
Think your business is too small for a
401(k) ? Think again. If you
have more than 25 employees, then you might be surprised to find
that a
401(k) is not as expensive to create and maintain as you may
have thought. "Due to the competitiveness amongst
401(k) providers,
the price point continues to drop," says Guy Patton, senior vice
president of emerging corporate markets at Fidelity2. For
example, Fidelity now offers a
401(k) package for
businesses with 25
employees or less that costs $1,400 per year in annual fees, plus
$28 per employee. Of course, this plan has limited flexibility —
you're going to pay more for the fancy plans.
|
401(k) |
|
|
Employers |
Employee |
|
Eligibility |
Any business. |
Employees who worked at least
1,000 hours in the past year; two years, if no vesting period. |
|
Contribution Limits |
Combined employer and employee's
contribution cannot exceed $41,000 ($44,000 if you are 50 or
older). |
$13,000 ($16,000 if you will be
age 50 or older as of 12/31/04.) |
|
Vesting |
Determined by employer. |
Determined by employer. |
|
Pros |
Employee/employer contributions.
Match not required. |
Employee can contribute. |
|
Cons |
Administration can be expensive. |
Employer contributions usually
take years to vest. |
Defined Benefit
Plan
Thought that defined benefit plans had gone out with shag carpet?
Maybe not. A defined benefit plan just might make sense for you.
(These plans can be administered through a Keogh.) If you are in,
say, your 50s, looking to retire in the next 10 years or so and
haven't built up your nest egg yet, then a defined benefit plan is a
good opportunity to save. You can contribute as much as is needed to
give you an annual retirement payout of $160,000 or 100% of the
average of your three highest consecutive pay years. (You'll need an
actuary to help you with the calculations.) Unfortunately, what's
good for you is bad for younger employees. Because they have more
years until retirement, their contribution limit will be lower than
yours.
And there are additional drawbacks.
For starters a defined benefit plan can be expensive and it's not
very flexible. For example, contributions are not optional. If you
can't fund your plan, then you'll have to change your plan document.
And "the IRS does not look kindly on companies that change their
plan frequently," says Tom Ferrara, president of Future Value
Associates, a company that helps establish benefits programs for
small businesses.
|
Defined Benefit Plan |
|
|
Employers |
Employee |
|
Eligibility |
Any business owner or
self-employed individual. |
Employees who worked at least
1,000 hours in the past year; two years, if no vesting period. |
|
Contribution Limits |
No set limit. Contributions are
based on actuarial assumption. Maximum annual retirement benefit
is $165,000 or 100% of the participant's average compensation
for his highest three consecutive earning years. |
Employees cannot contribute. |
|
Vesting |
Determined by employer. |
Determined by employer. |
|
Pros |
Older employers looking to put
away a lot of money over short time period can do so. |
You are guaranteed a set payout
after retiring. |
|
Cons |
Can be expensive. Actuary required
to determine contribution/deduction limit. Inflexible. |
No employee control over
investment options. No employee contributions. Vesting takes
years in most plans. |
Getting
Started
Ready to set up a plan? Any of the big no-load mutual fund companies
like Fidelity, T. Rowe Price and Vanguard3 would be more
than happy to oblige. Or, if you want more hand holding, you can
find yourself a good small business benefits consultant. But that
will cost you. Finally, for more details on any of these plans, read
IRS Publication 5604.
Related Articles:
Roth IRA Advantages
Roth IRA Basics
Roth IRA FAQ
401k Retirement Plans
Self Employed 401k
Solo
401(k) - 2
Solo
401(k) - 3
1http://www.troweprice.com
2http://www.fidelity.com
3http://www.vanguard.com
4http://www.irs.ustreas.gov/prod/forms_pubs/pubs.html
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