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SMART ANSWERS
By Karen E. Klein
MAY 4, 2000


SAR-SEP: The Retired Retirement Option

You can't start one anymore, but small companies have plenty of other choices

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Q:  I recently heard about a SAR-SEP but can't find a mutual fund or stock plan that offers one. I have six employees, including myself, and we probably won't grow to more than 10 or 12. Fidelity has a 401(k) for 25 or more employees, but the fees are too high. I already have a SEP-IRA and offer it to employees with more than two years' service. Will you be able to help me?

-- G.J.G., Succasunna, N.J.

A:  The reason you're having trouble locating them is that new SAR-SEPs are no longer being offered. According to the American Compensation Assn. in Scottsdale, Ariz., SAR-SEPs had to be established before Jan. 1, 1997, and no new ones may be started, although old ones can continue to operate and to add new employees.

A good alternative is a SIMPLE IRA program. "It's sort of a bare-bones 401(k) plan for smaller employers," says Neal B. Jannol, an attorney with the Los Angeles firm of Riordan & McKinzie. "A SIMPLE IRA can cost in the hundreds of dollars annually, and firms like Fidelity run them." You can set one up through your local bank, broker, insurance agent, or mutual-fund company. "It's not necessary to hire a lawyer to set one up," Jannol says.

Regular 401(k) plans, like the one you investigated, are established by for-profit companies that have "more than a few" employees. Although there is not usually a set minimum number, experts say that a 401(k) is probably not the best choice for a very small business like yours, because of the expense and time involved in establishing and administrating one.

Here's a quick rundown on several tax-deferred retirement savings options available beyond the traditional IRA:

Simplified Employee Pension IRA (SEP-IRA) Plans: SEP plans are essentially individual retirement accounts favored by sole proprietors (without employees) and independent contractors because they are easy to set up and administer. Like an IRA account, the money you contribute to a SEP-IRA is tax deductible and your investment earnings grow tax free until you withdraw funds at retirement. You can contribute up to 15% of your compensation or $30,000, whichever is less, each year.

Keogh Plans: These plans are for sole proprietorships, partnerships, and limited-liability companies (LLCs) -- not for incorporated businesses. Generally, Keogh plans are more flexible than SEPs and allow you to save more toward retirement. Keoghs can be set up as either a defined contribution plan (like a 401(k) or SEP) or as a defined benefit plan (like a traditional pension plan). Keogh plans are more flexible -- but also more complex. If you're considering a Keogh plan, you should probably seek the advice of a pension professional.

SIMPLE IRA: A company with up to 100 employees can use a SIMPLE plan, which is cheaper and easier to operate than other retirement plans, but imposes a limit on annual contributions. Using either an IRA or 401(k) as the funding mechanism (the rules vary slightly depending on which you choose), the employer can either match each employee's contribution (up to 3% of the employee's pay), or make an across-the-board 2% contribution for all employees whether they participate in the plan or not. The maximum contribution total for any employee is $12,000 annually.

You can get additional information on employee retirement plans from the Web site of the American Compensation Assn. and from a Web site designed for 401(k) participants.


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