Employer-Sponsored Retirement Plans

A study by National Small Business United and Arthur Andersen revealed that only 28 percent of small and medium-size businesses offer retirement benefits to their full-time employees. Many small businesses just can't afford to sponsor retirement plans.

However, you might be able to sponsor a retirement plan and not even realize it. A 401(k) plan is just one option. Before you dismiss the idea of sponsoring a retirement plan, consider all the available choices -- 401(k), SIMPLE IRA, profit-sharing plan, money-purchase plan, SEP IRA, or Keogh plan -- to determine whether you want to offer, or can afford to offer, one to your employees.

401(k)
A 401(k) is the most common company-sponsored savings plan. Any business with one or more employees can set one up. Employees can contribute up to $10,000 each year to their 401(k), and employers can choose if and how much they want to add. However, their combined contribution cannot exceed $30,000, or more than 15 percent of the worker's yearly compensation.

A 401(k) allows employees to contribute more tax-deferred money toward their retirement than other savings options. However, 401(k) plans are costly -- establishing and administering a plan requires the involvement of a third-party administrator or financial institution, and yearly costs are high.

SIMPLE IRA
A savings incentive match plan (SIMPLE) IRA is a tax-deferred retirement plan for sole proprietors or small businesses with fewer than 100 employees. Companies that do not maintain or contribute to other retirement plans can set up SIMPLE IRAs.

Under a SIMPLE IRA, employees can contribute up to $6,000 per year; employers must match the employee's contribution (up to 3 percent of the employee's yearly compensation) or contribute an amount equal to 2 percent of the employee's salary. With the exception of contribution limits, SIMPLE IRAs are subject to the same rules as standard IRAs.

Profit-Sharing Plan
Profit-sharing plans, which were initially developed to encourage hard work and loyalty, allow companies to set aside money for employees during profitable years. The company invests the money, and employees pay taxes only when the money is distributed, generally upon retirement. Profit-sharing plans are a good option for small businesses because they offer the greatest flexibility; an employer can contribute to the plan in profitable years and not contribute in lean years. Profit-sharing plans are also relatively easy to administer.

Money-Purchase Plan
Money-purchase plans are similar to profit-sharing plans, except they obligate the employer to contribute a predetermined amount outlined in the terms of the plan. This means a business must contribute even when it doesn't turn a profit. Employees may contribute up to 25 percent of their annual salary, or a maximum of $30,000 a year.

SEP IRA
Any business that doesn't already maintain another retirement plan can sponsor a simplified employee pension (SEP) IRA. The plan is funded by the employer, and is easy to set up and maintain. The maximum annual contribution for a SEP IRA is 15 percent of the employee's yearly compensation, or up to $24,000. Employers can decide each year whether to contribute funds to a SEP IRA.

Keogh Plan
A Keogh plan is a tax-deferred retirement savings plan for self-employed individuals. Although exact contribution limits depend on the type of Keogh plan, in general, a self-employed individual may contribute a maximum of $30,000 to a Keogh plan and deduct that amount from their taxable income.

For more information about each type of retirement plan, visit the U.S. Department of Labor's Employee Benefits Security Administration (EBSA) Web site.

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