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Reviewing Your Company's Retirement Plan Options

Small businesses, and their owners, have many retirement plan options. Choosing the right plan, or combination of plans, can be helpful as part of running the business and helpful to the owner for his or her retirement planning. Some of the rules can get complex and you should consult with a retirement plan professional as part of the decision making process. This article describes some of the options and can help make the discussions with the professional more effective.

Why have a plan?
For the owner, a qualified retirement plan can be an advantageous way to accumulate wealth. Contributions to the plan can be tax-deductible, earnings within the plan are tax-deferred and there can be flexible ways to take distributions from the plan.

For the business, providing a retirement plan can be a part of the total employee compensation package. The right plan can help attract, retain and motivate your employees.

How much does it have to cost?
Your cost for a retirement plan will take two forms - company contributions to the plan on behalf of employees and yourself and the cost of establishing and administering the plan. The chart below describes some of the funding features of different types of plans. Choosing a plan that allows for employee deferrals without requiring significant company contributions may be the option that provides the best of two worlds - permitting the accumulation of larger amounts of money and keeping the company cost low.

The administrative costs of plans vary. Some plans are as simple as employees having IRA accounts to receive contributions, while others require annual IRS filings and audits. Be sure to discuss administrative costs with your service provider and investigate what provider can provide the services you need at the lowest cost.

How much responsibility do you as the manager want?
Once money is contributed to a plan it must be managed and someone must make the investment decisions. This may mean the trustee of the plan must make investment decisions (or choose investment managers) or having a plan that enables each participant to manage their own funds. More and more plans are going this self-directed route.

Brief summary of plan types

Features SEP-IRA KEOGH SIMPLE-IRA 401(k)
Eligibility Self employed individuals, business owners, those with self-employment income Self employed individuals, business owners, those with self-employment income Self employed individuals, business owners, those with self-employment income Any public or private company. Usually for companies with more than 25 employees
Advantage Easy to set up and maintain Highest contribution limits Salary reduction with lower administration More features like vesting and loan provisions
Contribution source(s) Employer only Usually, employer only Employee wage deferral and employer contributions Mostly, employee wage deferral and optional company contributions
Annual contribution limits Up to 25% of compensation, with maximum of $50,000 (2012) Up to 25% of compensation, with maximum of $50,000 (2012)

Employee: Up to 100% of wages, $11,500 (2012) and up to $14,000 if age 50 or over.

Employer: EITHER, match employee contributions up to 3% of wages (maximum of $7,500 in 2012); OR, 2% of employee's wages to $5000 (2012)

Employee: Could be up to 25% of wages up to $17,000 (2012) and up to $22,500 if age 50 or over.

Employer: Up to 25% of wages, up to maximum of $50,000 (2012)

Vesting Immediate Vesting schedules are possible Employer and employee amounts are immediately vested Employee amounts are vested immediately. Employer amounts can be subject to vesting schedules
Administrative Issues No employer filings required Form 5500 No employer filings required Form 5500 and special discrimination testing required

Summary
The right retirement plan can serve many purposes. Be sure to investigate all the possibilities to make sure your plan accomplishes what you want. The services of a qualified retirement plan specialist can be very valuable in reviewing your options.