 
Company Retirement Plans
The decision to implement a retirement plan is one of the smartest
choices that a business can make. It can give you and your employees the
opportunity to save for your future while enjoying substantial tax
savings today. The benefit to a business owner is twofold. First, as a
business owner, a company-sponsored retirement plan can help you attract
and retain your most valuable business assets - quality employees.
Secondly, as a participant, a retirement plan will allow you to save for
your own retirement.
Simplified Employee Pension
A Simplified Employee Pension Plan, or SEP, may be an ideal choice for
self-employed individuals or small businesses because it is very easy to
administer. A SEP can provide many of the benefits of a standard
retirement plan, and is easy to establish and maintain. A SEP can also
give you more limited responsibility as an employer. Each of your
employees is responsible for his or her own SEP-IRA account. This means
less administrative hassle for you, and also there is a comparatively
small amount of government reporting. The typical candidates for
establishing SEP accounts are sole proprietors, consultants, and small
businesses -- especially those with high turnover rates or younger
employees.
How a SEP works
A SEP plan allows you to save up to 13.0435% of your net earnings each
year. The annual maximum is $22,173. All of your contributions into a
SEP plan are tax deductible. If you have employees, they must be
included in the plan as well. You must contribute the same percentage of
their earnings as you do personally. All employees who meet the
following criteria must be included in the plan:
- Age 21 or higher
- Employed by you for any amount of time during three of the last five
years, and
- Received at least $450 of compensation from you in the current year
Profit Sharing & Money Purchase
Qualified Retirement Plans like Profit Sharing and Money Purchase Plans
are types of retirement plans that are funded by the employer. They
allow employers to contribute to an employee's account, while offering
them business tax deductions and tax-deferred savings.
How the Profit Sharing Plan works
Profit Sharing Plans are designed for companies with fluctuating or
uncertain profits. These plans can be established by sole proprietors,
partnerships, or corporations. Companies can make a discretionary
contribution of up to 15% of an eligible employee's total compensation.
In a Profit Sharing Plan, the employer has the flexibility to determine
the contribution amount each year. Contributions do not have to be
dependent on profits. Contributions by the employer are tax deductible
as a business expense and are not treated as taxable income to the
employee.
How the Money Purchase Plan works
In Money Purchase Plans, the employer's contribution is mandatory. The
contributions are usually based on each employee's compensation. The
employer sets specific eligibility and vesting requirements, and
contributions can be as high as 25% of total compensation or $30,000
whichever is lower. Money Purchase Plans are less flexible than Profit
Sharing Plans because contributions must be made even if the company has
no profits.
Profit Sharing & Money Purchase Combination
Many companies choose to implement both of these types of plans in
conjunction with one another. This allows for a greater total
contribution percentage. By combining these two types of plans, an
employer can effectively contribute 25%, up to $30,000. A typical
example of how this works is an employer making a 10% mandatory Money
Purchase contribution, and a discretionary 15% contribution into the
Profit Sharing Plan. This type of approach offers some flexibility while
maximizing the potential contribution percentage.
SIMPLE IRA Plan
The Savings Incentive Match Plan for Employees-IRA replaced the SARSEP-IRA
for plans established after January 1, 1997. A SIMPLE-IRA is
specifically designed for companies with less than 100 employees.
Companies with more than 100 employees cannot use the SIMPLE Plan.
Additionally, companies cannot maintain or contribute into any other
type of retirement plan. In a SIMPLE Plan, contributions are made by
both employer and employee. Contributions are made on a pre-tax basis,
thus giving added tax benefits to the plan's participants.
How a SIMPLE Plan works
Employees can contribute 100% of their earned income up to a maximum of
$6,000 per year into a SIMPLE Plan. There is a mandatory employer match.
This can be either a 100% match on the first 3% of employees' total
compensation for all eligible employees who elect to participate in the
plan, or a 2% match on total employee compensation regardless of
employee participation. A SIMPLE plan can work great for a family-run
business. A husband and wife business can put in up to $24,000 combined
depending on their compensation. A SIMPLE Plan offers you and your
employees the opportunity to contribute money on a pre-tax basis into a
retirement account. SIMPLE Plans are easy to set up and administer, and
have minimal administrative costs.
401(k) Plan
The 401(k) Plan is probably the most widely-used company retirement
plan. The term 401(k) refers to the section of the Internal Revenue Code
which permits employees to defer part of their income into a
company-sponsored retirement plan. A 401(k) Plan is a great way to
attract and retain employees. 401(k) Plans allow for contributions by
both the employee and employer. A profit-sharing contribution can also
be made by the employer. This type of contribution is at the discretion
of the company. A matching contribution may also be made by the employer
on behalf of the employees. This type of contribution is mandatory if
that option is selected as a plan feature.
How a 401(k) Plan works
The flexibility of a 401(k) Plan allows companies to select plan
features to achieve specific goals for your company and your employees.
A plan must set specific eligibility requirements and vesting schedules.
A 401(k) Plan may require that employees be age 21 and/or completed at
least one year of employment with the company in order to participate.
If the plan calls for immediate vesting, two years of employment may be
required prior to becoming eligible.
Vesting is another term for ownership of the account balance and is
determined mainly by the source of the funds. Contributions that
employees make are always 100% vested, meaning that they always own all
of the money that they contribute into the plan. Contributions that
employer's make may follow a schedule in which the vesting percentage
increases with each year of employment. The maximum number of years
before an employee is fully vested is seven. This is at the employer's
discretion and can be less than seven years.
The maximum amount of annual contributions into a 401(k) Plan is 15% of
an employee's compensation or $10,000, whichever is less. Employee
contributions and company matching contributions cannot be more than 25%
of an employee's total compensation. Employers can alter their matching
contributions from year to year. |
