August 8, 2007
Small Business Retirement Plans
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Small business retirement plans are an ideal way for employers to retain employees and also set up a retirement account for themselves. The simplest retirement plan is the Simplified Employee Pension (SEP) plan. Though it is designed for self-employed individuals, partnerships, sole proprietors and independent contractors, other businesses are also eligible for the plan. A SEP plan requires the least amount of paperwork. Employers can establish a SEP plan only if they do not have any other qualified retirement plan in effect.
An employer is required to open an individual retirement account (IRA) for each eligible employee and make contributions to their accounts. The employer is responsible for funding the entire contribution. The employer may make a contribution of up to or lesser than 15% or $30,000 of compensation to the IRAs established in each employee’s name. This arrangement is also known as a SEP-IRA.
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Contributions to this account may be withdrawn or transferred by the employee at any time. These accounts are subject to all applicable IRA rules regarding transfer, withdrawal and taxation.
The Savings Incentive Match Plan for Employees (SIMPLE) was established by the Small Business Owners Protection Act of 1996. Employers that do not have any other retirement plan and have 100 or fewer employees, with at least $5,000 in compensation for the previous year, are eligible to set up a SIMPLE.
SIMPLE may be structured as an Individual Retirement Account (IRA) or a 401(k) plan. Contributions are vested with the employee, and deposits and earnings in the account, accumulate tax free until withdrawn. Distributions from SIMPLE are taxed just as those from an IRA. SIMPLE plans are not eligible for transfer to other qualified retirement plans.
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A Keogh or HR 10 plan is a tax-deferred retirement savings plan for sole proprietors or partnerships. Under this plan, all contributions are deducted from the gross income of an employee. In case of a net loss due to self-employment, no contribution for oneself can be made for the year. All taxes are deferred until the funds are withdrawn. The contribution limits as stipulated in a HR 10 plan are more liberal than Individual Retirement Accounts.
Small business retirement plans have been designed to enable employees of smaller organizations to save for their retirement.
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