Expert: Shirley McAllister, CPP, PHR - 3/10/2009

Question
As a small business owner, with fewer than ten employees, I'm curious if an inexpensive and simple retirement plan exists for me that would let my employees contribute to the plan pre-tax and also save me on payroll taxes? I don't want to always contribute to the plan but would like the option if we have a particularly good year. Thank you.

Answer
The 401K plan is the most widely used plan. It is under ERISA and there are many regulations, it is not simple to administer but it is the one that the employer does not have to contribute toward. You can have matching contribution or is you wish profit sharing or simply a plan for employee pretax pension contributions.

There are simpler plans but they do require minimal employer participation.

SEP Plan
An SEP is a retirement plan established by employers, including self-employed individuals (sole proprietorships or partnerships). The SEP is an IRA-based plan to which employers may make tax-deductible contributions on behalf of eligible employees. The employer is allowed a tax deduction for plan contributions, which are made to each eligible employee's SEP IRA on a discretionary basis.

The SEP pension plan provides a means for small employers to provide tax favored retirement plans for their employees without the complex requirements of ERISA and IRC. Seps have simplified participation, vesting and contribution limits. Contributions must be made for all employees who meet the participation standards during the calendar year even if they are not employed at the time the contribution is made. The contributions made to an employee's SEP plan are 100% vested at the time they are made. SEP accounts are managed by a financial institution that supplies information to employees. Employers sponsoring a SEP have limited reporting and disclosure duties.

SIMPLE plans
Employers with 100 or fewer employees that do not sponsor another qualified retirement plan may adopt the SIMPLE plan. Under this plan employees can defer up to the specified limit . Employers must match the contributions a dollar for dollar basis up to 3 per cent of the employees contribution. A lower percentage may be elected in 2 out of 5 years but not less than 1%. In any year in lieu of matching contributions the employer can make a 2 percent of compensation contribution on compensation of up to the allowed limit for each employee with at least 5,000 in compensation during the year.  Plans that meet these rules and proved 100 percent vesting automatically pass the complex nondiscrimination rules for retirement plans. SIMPLE plans are also subject to relaxed reporting and disclosure requirements.

You can read about these plans at the following sites:

Department of labor SEP plan
www.dol.gov/ebsa/Publications/SEPPlans.html

IRS Sep plan
www.irs.gov/retirement/sponsor/article/0,,id=139828,00.html

Simple IRA plan Department of labor
http://www.dol.gov/ebsa/publications/simple.html

Simple IRA plan IRS
http://www.irs.gov/retirement/article/0,,id=137825,00.html

I hope this helps start you in the right direction to finding a plan that is right for your business. If you should go with a 401K plan you would need help from a professional in that area, a TPA, an insurance company or someone familiar with the 401K plan as they are complex to start, and complex to administer.

Shirley