Simplified Employee Pension
This plan (often called a SEP) is by far the easiest pension plan to establish and maintain. It has become quite
popular with very small businesses because it allows them to simply make contributions to
each employee's own IRA account. The employer contribution is limited
to 20% of compensation or $45,000 in 2007. The employee can still make his or her own
$3,000 (in 2007) annual contribution.
The big drawback for an employer, however is that since the
money goes directly into the employees' personal IRAs, they are immediately 100% vested.
Since they can take the money with them to a new employer, there is no financial
barrier to employee turnover that is built into more complicated plans with vesting
schedules.
Another consideration for employers considering a SEP is that it may be
difficult to exclude part-time employees from participating in contributions.
SIMPLE-IRA
The SIMPLE-IRA, or Savings Incentive Match
Plan for Employees-IRA, replaced the SARSEP-IRA for new plans established on
or after January 1, 1997.
The SIMPLE-IRA is a tax-deferred retirement
plan provided by sole proprietors or small businesses (fewer than 100
employees) who do not maintain or contribute to any other retirement plan.
Contributions are made by both the employee and the employer. In a
SIMPLE-IRA, contributions and the investment earnings can grow tax-deferred
until withdrawal (assumed to be retirement), at which time they are taxed as
ordinary income.
Annually, the maximum employee contribution
is $10,500 in 2007 ($13,000 if age 50 or older), plus your employer's
contribution. With the exception of the higher contribution limits,
SIMPLE-IRAs are subject to the same rules as a regular IRA.
Profit Sharing
This is a more
formalized plan which requires annual IRS reporting and generally costs much more to
establish and administer. The company will also have fiduciary
responsibility to
ensure that the plan is maintained in the best interests of the employees. There is
a tremendous amount of flexibility, however.
The company can make discretionary
contributions of up to 25% of employees' compensation or $45,000 in 2007 (subject to
discrimination testing) and establish vesting schedules which may encourage long-term
commitments from employees. Profit sharing plans also may allow loans and hardship
withdrawals for the employees.
401(k) Profit Sharing
A profit sharing
plan which allows pre-tax salary reductions of up to $15,500 in 2007 each by the
employees. The employer may match the employees' contributions up to a maximum of
25% of compensation. The administration and record keeping requirements are similar
to those of a typical profit sharing plan. The employer match can be used to
encourage participation.
Money Purchase Plan
A money purchase
plan has a fixed contribution formula and allows employer contributions up to 25% of
compensation or $45,000 in 2007. Many employers pair them with a profit sharing plan for maximum
flexibility and contributions. There are, however several specific requirements
involved in the distribution rules of a money purchase plan.
We can assist you in examining all of the options
of establishing a retirement plan for your employees. It pays to shop around when
looking for an administrator or investment company since their fees can vary widely and
many of them use complicated fee schedules which can create difficulty in trying to
compare them. If your company has around 100 employees, you should expect to have
401(k) startup fees between $1,000 and $2,500 and administration and investment fees
between $50 and $100 per participant per year.
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