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Retirement Plans for Small Businesses

If you’re self-employed or own a small busi¬ness and you haven’t established a retirement savings plan, what are you waiting for? A re¬tirement plan can help you …

Tax advantages
A retirement plan can have significant tax advantages:
– Your contributions are deductible when made.
– Your contributions aren’t taxed to an employee until dis¬tributed from the plan.
– Money in the retirement program grows tax deferred (or, in the case of Roth accounts, potentially tax free).
– You may be able to claim a tax credit equal to 50 percent of the cost to set up and administer a retirement plan, up to a maximum of $500 per year for each of the first three years of the plan.
– Certain low- and moderate-income employees may be entitled to a tax credit (saver’s tax credit) for a portion of their contributions to the plan.
Types of plans
Retirement plans are usually either IRA-based (like SEPs and SIMPLE IRAs) or qualified (like 401(k)s, profit-sharing plans, and defined benefit plans). Qualified plans are generally more complicated and expensive to maintain than IRA-based plans because they have to comply with specific Internal Revenue Code and ERISA (the Employee Retirement Income Security Act of 1974) requirements in order to qualify for their tax bene¬fits. Also, qualified plan assets must be held either in trust or by an insurance company. With IRA-based plans, your em¬ployees own (i.e., “vest” in) your contributions immediately. With qualified plans, you can generally require that your em¬ployees work a certain numbers of years before they vest.
Which plan is right for your business?
With a dizzying array of retirement plans to choose from, each with unique advantages and disadvantages, you’ll need to clearly define your goals before attempting to choose a plan.
For example, do you want:
– To maximize the amount you can save for your own retirement?
– A plan funded by employer contributions? By employee contributions? Both?
– A plan that allows you and your employees to make pretax and/or Roth contributions?
– The flexibility to skip employer contributions in some years?
– A plan with the lowest cost? Easiest administration?
The answers to these questions can help guide you and your retirement professional to the plan (or combination of plans) most appropriate for you.
Simplified employee pension (SEP) plan
An SEP allows you to set up an IRA (a SEP-IRA) for yourself and each of your eligible employees. You contribute a uniform percentage of pay for each employee, although you don’t have to make contributions every year, offering you some flexibility when business conditions vary. For 2009, your contributions for each employee are limited to the lesser of 25 percent of pay or $49,000. Most employers, including those who are self-employed, can establish an SEP.
SEPs have low start-up and operating costs and can be estab¬lished using an easy two-page form. The plan must cover any employee aged 21 or older who has worked for you for three of the last five years and who earns $550 or more.
The SIMPLE IRA plan is available if you have 100 or fewer employees. Employees can elect to make pretax contributions in 2009 of up to $11,500 of pay ($14,000 if age 50 or older). You must either match your employees’ contributions dollar for dollar—up to 3 percent of each employee’s compensation–or make a fixed contribution of 2 percent of compensation for each eligible em¬ployee. (The 3 percent match can be reduced to 1 percent in any two of five years.) Each employee who earned $5,000 or more in any two prior years, and who is expected to earn at least $5,000 in the current year, must be allowed to participate in the plan.
SIMPLE IRA plans are easy to set up. You fill out a short form to establish a plan and ensure that SIMPLE IRAs are set up.
Profit-sharing plan
Typically, only you, not your employees, contribute to a quali¬fied profit-sharing plan. Your contributions are discretionary—¬there’s usually no set amount you need to contribute each year, and you have the flexibility to contribute nothing at all in a given year if you so choose (although your contributions must be “substantial and recurring” for your plan to remain qualified). The plan must contain a formula for determining how your contributions are allocated among plan participants. A separate account is established for each participant that holds your contributions and any investment gains or losses. Generally, each employee with a year of service is eligible to participate (although you can require two years of service if your contributions are immediately vested).
401(k) plan
The 401(k) plan (technically, a qualified profit-sharing plan with a cash or deferred feature) has become a hugely popular re¬tirement savings vehicle for small businesses. According to the Department of Labor, an estimated 48 million American workers are enrolled in 401(k) plans with total assets of about 2.4 trillion dollars. With a 401(k) plan, employees can make pretax contributions in 2009 of up to $16,500 of pay ($22,000 if age 50 or older). These deferrals go into a separate account for each employee and aren’t taxed until distributed. Generally, each employee with a year of service must be allowed to contribute to the plan.
You can also make employer contributions to your 401(k) plan–either matching contributions or discretionary profit-sharing contributions. Combined employer and employee con¬tributions for any employee in 2009 can’t exceed the lesser of $49,000 (plus catch-up contributions of up to $5,500 if your employee is age 50 or older) or 100 percent of the employee’s com¬pensation. In general, each employee with a year of service is eligible to receive employer contributions, but you can require two years of service if your contributions are immediately vested.
The 401(k) plans are required to perform somewhat complicated testing each year to make sure benefits aren’t disproportion¬ately weighted toward higher paid employees. However, you don’t have to perform discrimination testing if you adopt a “safe harbor” 401(k) plan. With a safe harbor 401(k) plan, you gen¬erally have to either match your employees’ contributions (100 percent of employee deferrals up to 3 percent of compensation, and 50 percent of deferrals between 3 and 5 percent of compensation), or make a fixed contribution of 3 percent of compensation for all eligible employees, regardless of whether they contribute to the plan. Your contributions must be fully vested.   
Defined benefit plan
A defined benefit plan is a qualified retirement plan that guar¬antees your employees a specified level of benefits at retire¬ment (for example, an annual benefit equal to 30 percent of final average pay). As the name suggests, it’s the retirement benefit that’s defined, not the level of contributions to the plan. In 2009, a defined benefit plan can provide an annual benefit of up to $195,000 (or 100 percent of pay if less). The services of an actuary are generally needed to determine the annual contri¬butions that you must make to the plan to fund the promised benefit. Your contributions may vary from year to year, de¬pending on the performance of plan investments and other factors.
In general, defined benefit plans are too costly and too com¬plex for most small businesses. However, because they can provide the largest benefit of any retirement plan, and there¬fore allow the largest deductible employer contribution, defined benefit plans can be attractive to businesses that have a small group of highly compensated owners who are seeking to con¬tribute as much money as possible on a tax-deferred basis.  
As an employer, you have an important role to play in helping America’s workers save. Now is the time to look into retirement plan programs for you and your employees.
Disclosure Information: Securities offered though Cambridge Investment Research, Inc., a registered broker/dealer, Member FINRA./SIPC. Investmentadvisory services offered through PensionTrend Investment Advisers, LLC, a registered investment adviser. Cambridge InvestmentResearch, Inc. and
PensionTrend Investment Advisers, LLC are not affiliated.

Tom Small
Tom Small is a financial and estate planning specialist with PensionTrend Investment Advisers, LLC in Okemos. He has more than 15 years of experience and specializes in retirement and estate planning strategies for high net worth clients.




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