Retirement savings plans: better than ever for your employees and your business.
1. Attract, reward and retain quality employees.
2. Reduce taxes.
3. Maximize benefits that accrue to you, the owner.
Recent changes in tax laws and innovations by Web-based plan administrators have substantially reduced cost and complexity, and increased allowable contributions and flexibility of retirement savings plans for small businesses. SEP and SIMPLE plans cost nothing to set up and have no annual maintenance expense. Even the more complex plans such as profit sharing and defined benefits/401(k) plans should cost small businesses no more than $2,000 to set up and administer annually (and the IRS will give you a tax credit of up to $500 per year for the first three years of your plan).
There's a Great Plan for Your Business
Three types of retirement savings plans are available to small businesses: Simplified Employer Pension (SEP), SIMPLE IRA and Qualified Plans. Each includes the following:
* Available to any business with fewer than 100 employees (even a one-person business).
* Businesses may expense, or deduct, contributions made to retirement accounts of employees (including you) in the year they were contributed.
* Contributions are not taxed as income to employees (i.e., contributions are made pretax).
* Owners of the business may participate in the plan as long as they are employees or have earned income (as defined by the IRS) from the business. This means that virtually any type of business--sole proprietorship, LLC, S-Corp., C-Corp., Partnership, etc.--can take advantage of these plans.
Plan Type 1 of 3: Simplified Employer Pension (SEP)
The SEP is a simplified method by which an employer can offer a plan and contribute to the retirement accounts of employees. It allows the employer to deposit contributions directly into traditional IRA accounts of employees, which eliminates the need to manage and invest the monies for employees and deal with the more complicated and costly requirements of other plans.
Eligibility: Every employee 21 years of age or older who has worked for the company for three of the past five years and earned more than $500 in the current year must be included in the plan and receive employer payments.
Contribution Requirements and Limits: Each year, the employer can decide what percentage of salary he or she wishes to contribute to each employee's account, but it must be the same percentage for each employee. The minimum amount is zero. The maximum amount is 25 percent of annual salary, to a maximum of $45,000 (2007).
Vesting: Contributions are 100 percent vested when earned, i.e., monies contributed to accounts of employees are immediately theirs to keep, forever.
Matching: Employees cannot contribute a portion of their own salary, so there is no matching component. But employees may set up a separate IRA and contribute their own monies to it.
Other: Any business may set up a SEP. Employers may have a SEP in addition to a qualified plan such as a profit sharing and/or 401(k) plan.
Plan Type 2 of 3: Savings Incentive Match Plan for Employees (SIMPLE IRA)
A SIMPLE IRA is similar to a SEP. It's simple and inexpensive to set up and maintain, and contributions are made directly to IRA accounts of employees. It differs from a SEP in two primary ways:
1. Employees may allocate a portion of their salary, commonly referred to as a "salary reduction contribution," to be deposited in the IRA.
2. Employers make contributions only as matches to employee contributions.
Eligibility: Any employee who is reasonably expected to receive $5,000 in the current calendar year, and who has received $5,000 or more during the two prior years, may participate. Employers may choose a less stringent employee qualification standard, but not a more stringent one.
Contribution Requirements, Limits and Matching: Employees may contribute up to 100 percent of their pay up to an annual maximum of $10,500 if under 50 years of age in 2007. Employees over 50 years of age may contribute up to $13,000 in 2007. The employer is generally required to match employee salary reduction payments, dollar for dollar, up to the lesser of 3 percent of compensation (up to a 2007 salary maximum of $225,000) or $6,750 (2007). But employers may lower their matching contribution to less then 3 percent (but not less than 1 percent) in any two years of a rolling five-year period.
Vesting: None (i.e., funds are immediately vested).
Other: Any business can set up a SIMPLE IRA plan. Employers cannot have any other plan in addition to a SIMPLE IRA. Salary reduction contributions are subject to Social Security, Medicare, and unemployment (FUTA) taxes. Matching contributions are not. If your company has a 401(k) plan, you can adopt the less-expensive and easier-to-administer SIMPLE IRA account structure if you meet the employer size limits (under 100 employees). But your "SIMPLE 401(k)" still will be a qualified plan and must meet the other requirements of qualified plans (see below).
Plan Type 3 of 3: Qualified Plans
Qualified plans, also called H.R. 10 plans, or Keogh plans when covering self-employed individuals, are more complex and costly but offer increased flexibility in plan design and higher contribution limits. There are two types of qualified plans--Defined Contribution and Defined Benefit.
Defined Contribution (DC) Plan: Allows the employer to contribute to employee retirement accounts amounts up to 100 percent of salary, up to $45,000 (2007) per employee. There are two types of DC plans:
Profit-Sharing Plan: This is a plan for sharing your business profits with your employees. A preset contribution plan is not required as long as contributions are "regular and substantial." But distribution of contributions must be made to employees on a pre-established formula. Employee forfeitures that occur due to vesting schedules can be reallocated to employees based on the preset allocation plan or be used by the employer toward future contributions.
In addition, employers can include a 401(k) component in their profit-sharing plan. This allows employees to elect to make salary-reduction contributions. The 2007 limit on elective deferrals is 100 percent of salary up to $15,500 if the employee is under 50 years of age; $20,500 if over 50. Salary reduction contributions are subject to Social Security, Medicare, and unemployment (FUTA) taxes. Matching contributions are not.
Money Purchase Pension Plan: Contributions are fixed and not based on company profits. For example, you may contribute annually to each employee's account an amount equal to 10 percent of his or her yearly salary. Employees can't make salary-reduction contributions
Defined Benefit (DB) Plan: Contributions are based on what is needed to provide established, determinable benefits to plan participants. Actuarial assumptions and computations are required to figure these contributions, so an expert in this specialized area must be used on an ongoing basis. Employee forfeitures, which result from employees leaving before being fully vested, cannot be distributed to employee accounts. But the employer can use the forfeited funds to meet future contribution requirements. Annual contributions of up to $180,000 are allowed in 2007. Employees cannot elect to make salary-reduction contributions.
Employers who have set up any of the above Qualified Plans may craft their own employee eligibility requirements so long as they do not discriminate between employees and owners. As such, Qualified Plans allow employers to exclude more employees than do SEP or SIMPLE IRA plans.
Other: Setup costs for a Qualified Plan are generally higher, and extensive documentation is required. Most companies adopt master or prototype plans made available by plan providers and pre-approved by the IRS.
Note About 401(k)Plans: A 401(k) plan is an elective component of a Qualified Plan. It is simply a provision that allows the employee to elect to instruct the employer to make salary-reduction payments to the employee's retirement account. Employers may elect to match employee contributions but are not obligated to do so.
Note About SARSEP: A SARSEP is a SEP set up before 1997 and includes a salary reduction arrangement. SARSEPs are no longer available, but plans established prior to 1997 still are allowed to continue.
The only reason that a retirement investment plan may not be appropriate for you and your business at this time is if your business is struggling just to survive. But when profit and cash flow allow, you'll want to establish a good benefits plan to better equip you to attract and retain talent, reduce your tax bill, and more fully take advantage of the perquisites of business owners--one of which is valuable and generous government programs that allow you to sock away big pretax dollars for your retirement.
2007 Maximums Regular IRA (inc. Roth) $4,000 ($5,000 if over 50) SEP $40,000 ($45,000 if over 50) SIMPLE $10,500 ($13,000 if over 50) Defined Contribution Plan $40,000 ($45,000 if over 50) Defined Benefit Plan $180,000 Mandatory Company 2007 Maximums Contribution? Vesting SEP $40,000 ($45,000 No No (fund if over 50) are immediately fully vested) SIMPLE $10,500 ($13,000 Yes--must match No (fund if over 50) employer contributions, are dollar for dollar, up immediately to the lesser of $3% of fully salary or $6,650 (but vested) in two out of 5 years can limit match to 1% of salary). Defined $40,000 ($45,000 Yes, but the amount As desired Contribution if over 50) may vary each year as Plan employer desired. Defined $180,000 Yes. As desired Benefit Plan Exclusion/Exclusion SEP All employees 21+ and earned $500+ three of past five years. SIMPLE All that have rec'd/will receive $5,000 in prior 2 years and current year. Defined As employer desires as long as it Contribution does not discriminate between Plan owners and non-owners. Defined As employer desires as long as it Benefit Plan does not discriminate between owners and non-owners.
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|Publication:||The Business Owner|
|Date:||Jul 1, 2007|
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