BW Online | June 30, 2000 | Pension Plans for Small Business

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JUNE 30, 2000

STAFF & BENEFITS

Pension Plans for Small Business
A comparison of major retirement options and their key features, compiled by the Pension and Welfare Benefits Administration

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SEP-IRA

Payroll Deduction IRA

SIMPLE-IRA

401(k)

Profit Sharing

Defined Benefit

Money Purchase Plan

Key

Advantage

Easy to set up and maintain.

Salary reduction plan with

little administrative paperwork.

Permits employee to contribute

more than in other options.

Permits employer to create

large account balances for employees.

Provides a fixed, pre-established

benefit for employees.

Permits employer to make

a larger contribution than through other Defined Contribution Plans.

Employers Who Can Provide This Option

Any business that does

not currently maintain any other retirement plan.

Any business with one or

more employees.

Any business with 100 or

fewer employees that does not currently maintain any other retirement plan.

Any business with one or

more employees.

Employer's Responsibilities

Set up plan by completing

IRS Form 5305-SEP.

No employer tax filing required.

Set up arrangements for

employees to make payroll deduction contributions. Transmit contributions

for employees to funding vehicle.

No employer tax filing required.

Set up by completing IRS

F5304-SIMPLE or 5305-SIMPLE. No employer tax filing required. Bank

or financial institution does most of the paperwork.

There is no model form

to establish a plan. Advice from a financial institution or employee benefit

advisor would be necessary.

Annual filing of IRS

Form 5500 required. Also requires special testing to ensure plan does

not discriminate in favor of highly compensated employees.

There is no model form

to establish a plan. Advice from a financial institution or employee benefit

advisor would be necessary.

Annual filing of IRS

Form 5500 is required.

There is no model form

to establish a plan. Advice from a financial institution or employee benefit

advisor would be necessary.

Annual filing of IRS

Form 5500. Actuary must determine funding obligations.

There is no model form

to establish a plan. Advice from a financial institution or employee benefit

advisor would be necessary.

Annual filing of IRS

Form 5500 is required.

Funding Responsibility

Employer contributions

only.

Employee contributions

remitted through payroll deduction.

Employee salary reduction

contributions and/or employer contributions.

Employer contribution level

can be determined year to year.

Primarily employer; may

require or permit employee contributions.

Employer contributions

only.

Maximum Annual Contribution Per

Participant

Up to 15% of compensation

or maximum of $24,000 (indexed). 1

$2,000

Employee: $6,000

per year (indexed). Employer: Either match employee contributions

$ for $ up to 3% of compensation (can be reduced to as low as 1% in any

2 out of 5 yrs.) or contribute 2% of each eligible employee's compensation,

up to $3,200 2

Employee: $10,000

(indexed). Employer/Employee combined: Up to a maximum of

15% of compensation or a maximum of

$30,000. 1

Up to a maximum of 15%

of salary or a maximum of $30,000. 1

Per plan terms, employer

may permit or require employee contribution.

Up to a maximum of 25%

of salary or a maximum of $30,000. 1

Minimum Employee Coverage Requirements

Must be offered to all

employees who are at least 21 years of age, employed by the business for

3 of last 5 years and earned at least $400 in a year.

Should be made available

to all employees.

Must be offered to all

employees who have earned at least $5,000 in previous 2 years.

Must be offered to all

employees at least 21 years of age who worked at least 1,000 hours in previous

year.

Withdrawals, Loans & Payments

Withdrawals at anytime;

subject to current federal income taxes and a possible 10% penalty if the

participant is under age 59 1/2.

Withdrawals at any time.

If employee is under age 59 1/2, may be subject to a 25% penalty if taken

within the first 2 years of participation and a possible 10% penalty if

taken afterwards.

Cannot take withdrawals

until a specified event, such as reaching 59 1/2, death, separation from

service or other event as identified in plan. May permit loans and hardship

withdrawals. Withdrawals may be subject to a possible 10% penalty if participant

is under age 59 1/2.

May permit loans and hardship

withdrawals. Hardship withdrawals may be subject to a possible 10% penalty

if participant is under age 59 1/2.

Payment of benefits generally at

retirement.

Payment of benefits generally

at retirement, may offer participant loans.

Vesting

Immediate 100%

Employee and employer contributions

vested 100% immediately.

Employee contributions

vested immediately. Employer contributions may vest over time according

to plan terms.

May vest over time according

to plan terms.

Contributor's Options

Employer can decide whether

or not to make contribution year to year.

Employee can decide how

much to contribute at any time.

Employee can decide how

much to contribute. Employer must make matching contributions or contribute

2% of each employee's salary up to the set maximum.

Employee makes contribution

as set by plan option. The employer may match.

Employer makes contribution

as set by plan terms.

Employer makes contributions

as set by plan terms.

Employer makes contribution

as set by plan terms.

1 Maximum compensation on which 1997 contributions can

be based is $160,000. For plan years beginning

on or after January 1, 1998, maximum compensation

on which contributions can be based is $160,000.

2 Maximum compensation on which 1998 employer 2% non-elective

contributions can be based is $160,000.