Choosing the right plan: employee retirement plans can offer substantial business and employee benefits.

In today's economy, a retirement plan for your employees may not feel like a priority. But establishing a company-sponsored retirement plan may be one of the smartest moves you can make. The right plan may reduce current tax obligations for your business and enable you to build personal wealth while attracting and retaining talented employees.

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While many small business owners put off establishing a retirement plan doesn't have to be complicated. You should work with your financial advisor and tax professional to establish or update a plan that provides the flexibility you want for your business, rewards employees and helps you build personal wealth.

One of the many important factors to consider when establishing an employee retirement plan is the size of your business. Each plan option has different requirements and offers varied benefits, so choose the plan that is right for you and your business. Also, keep in mind that as your business grows and evolves, you can change your retirement plan.

To help you choose the most appropriate employee retirement plan for your business, here is a brief overview of some of the most popular plans for small business owners.

SIMPLE IRA 

The Savings Incentive Match Plan for Employees (SIMPLE) IRA may be a good choice as a first retirement savings plan for small businesses that want to offer employee salary deferral contributions and who have 100 or fewer employees. The SIMPLE IRA tends to be a less complex and generally more affordable way to offer retirement benefits to employees since the SIMPLE IRA is not subject to many of the administrative costs and filing requirements associated with other types of retirement plans that offer employee salary deferral contributions. Eligible employees may contribute up to $10,500 each year through convenient payroll deductions that may reduce their taxable income. Employees age 50 and older may be eligible to contribute additional "catch up" contributions of up to $2,500.

With a SIMPLE IRA, the employer is required to make annual contributions of either a non-elective two percent contribution for each eligible employee, regardless of participation, or a matching contribution of up to three percent of each participating employee's compensation. Although employer contributions are generally tax deductible, you may have concerns about ongoing financial commitments in an uncertain economic climate. If that is the case, a convenient alternative for you may be the Simplified Employee Pension (SEP) IRA plan discussed in the next paragraph.

SEP-IRA 

A SEP-IRA plan may be particularly suitable for your business if your company's profits vary from year to year or if you are looking for flexibility to change the contribution each year. Employers can make annual contributions that are generally tax-deductible for each eligible employee up to the lesser of $45,000 or 25 percent of a maximum of $225,000 compensation in 2007. However, the employer is not required to contribute in any given year and can change their contributions based on the performance of the business.

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Tax Credit

SIMPLE and SEP plans have become even more appealing to small business owners due to the tax credit created by the Economic Growth and Tax Relief Reconciliation Act of 2001. Generally, if you have 100 or fewer employees and establish a SEP or SIMPLE plan, you may be eligible for a non-refundable income tax credit equal to 50 percent of the first $1,000 of certain plan administrative and retirement education expenses for each of the first three years of the plan.

Profit-sharing Plans 

Profit-sharing plans are also a popular way to offer employees retirement benefits when a business is concerned about cash flow. Although administrative costs may be higher, there may be additional benefits. A profit-sharing plan can be established for businesses of any size and provides for flexibility in annual employer contributions. You decide how much you want to contribute, or if you are able to contribute at all. If you do contribute, you set the percentage of each participant's compensation to contribute to the plan each year. Your contribution generally may be used as a business tax deduction. Profit-sharing plans are subject to compliance testing and IRS Form 5500 filing.

401(k) Plans

One of the most popular types of employee benefit plans is the 401(k) plan. Employees may reduce taxable income by making salary deferral contributions while controlling how their retirement savings are invested. Employer contributions are optional and can be made either through employer matching or profit sharing contributions and are generally tax deductible. The new tax law has made the 401(k) plan, along with other retirement plans, even more attractive by increasing annual contribution limits. 401(k) plans are subject to compliance testing and IRS Form 5500 filing.

Defined Benefit Plan 

Defined benefit plans were popular among large corporations during the '80s and have since been replaced by more affordable large-scale plans. However, they are often an ideal solution for small business owners, especially those approaching retirement. With a defined benefit plan, you may be able to make substantial contributions to quickly build a retirement nest egg.

Defined benefit plans are also an ideal solution for entertainers, athletes and on-air personalities who often receive generous compensation over a limited period of time. With a defined benefit plan, individuals with short-term, high-paying careers can make substantial contributions to their retirement plan while taking advantage of tax savings.

There are drawbacks to defined benefit plans, especially for younger employees. Firstly, since they have longer to save for retirement, their contribution limits are lower than more senior employees. Also, contributions are not optional, and if you can't pay your contributions, you'll have to change plans. In addition, defined benefit plans have several filing requirements including IRS Form 5500 and Pension Benefit Guaranty Corporation (PBGC) premium payments and reporting requirements.

Retirement Plan Alternatives

Even if you do not want to formally adopt or sponsor a retirement plan, you can provide a simple and direct way for employees to contribute to their IRA through payroll deduction. Though it's not an employer sponsored retirement plan, it does give your employees the opportunity to contribute up to $4,000 to their IRA. Employees age 50 and older may be eligible to contribute additional "catch up" contributions of up to $1,000.

Regardless of which retirement plan you choose, be sure to communicate with your employees to help them make appropriate investment choices and increase the likelihood of their participation. Consider offering pre-enrollment and enrollment communications, education seminars, individual counseling, plan statements and newsletters. Additionally, make sure participants have a current copy of the plan's Summary Plan Description.

If your company has already established an employee retirement plan, it is important to reassess the plan every year to ensure you're getting all the benefits possible for you, your business and your employees. Over time, your business needs will grow and change. When first starting out, you may find that a SEP-IRA or SIMPLE IRA is the most appropriate choice for you. As your cash flow improves, or as you add employees, you may want to consider changing to a profit sharing, money purchase pension or 401(k) plan.

Review your revenue stream from the past several years as well as your future business plans to determine if your retirement plan still fits your business needs and goals. At the same time, you'll want to work with your financial and legal advisors to ensure that you and your retirement plan meet all applicable legal requirements and regulations.

Retirement planning can be a daunting task, particularly for busy business owners, but it can be one of the most important moves you make for yourself, your business and your employees. Always remember, you don't have to go at it alone--you can work with a financial advisor to help you develop a personalized plan that meets your business and personal goals.

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Neither Merrill Lynch nor its Financial Advisors provide legal or tax advice. You should consult with your own legal/tax advisors regarding your particular situation.

Darnell D. Jackson is first vice president and wealth management advisor for Merrill Lynch.

SIMPLE and SEP plans have become even more appealing to small business owners due to the tax credit created by the Economic Growth and Tax Relief Reconciliation Act of 2001.

As your cash flow improves, or as you add employees, you may want to consider changing to a profit sharing, money purchase pension or 401 (k) plan.

If your company has already established an employee retirement plan, it is important to reassess the plan every year to ensure you're getting all the benefits possible for you, your business and your employees.

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