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SMART ANSWERS
By Karen E. Klein

8.31.99  
There's Nothing Simple about Retirement Plans
Options and resources for the smallest companies

Q: I am trying to find some information on how to set up IRA accounts for the five employees in my company. Would you be able to provide any information on how I would get started and who I might contact? — J.D., Burke, Va.

A: You are wise to think about setting up retirement accounts for your employees. A few years ago, small businesses could get away with not offering such benefits. That's no longer the case. In this competitive job market, businesses that don't offer retirement accounts may have trouble hiring or retaining qualified workers.

That said, it's not easy to find a suitable plan, particularly if you've got a new company or a small budget for employee benefits. Ask your CPA or certified financial planner to explain the different types that are suitable for small businesses, their costs (to you and your employees), their respective administrative burdens, and any tax implications.

Given the size of your company, your best bet is to find a plan that doesn't cost a lot to administer and won't require extensive reporting. That probably rules out a 401(k) plan, says Scott Coles (scoles@fmncc.com), director of advanced planning at Financial Management Network, Inc. in Orange County, Calif. If you want to handle the administrative aspects yourself, make sure the rules governing the type of plan you choose aren't too complex. If you make mistakes, you may be liable for high penalties.

Below are thumbnail sketches of two options based on Individual Retirement Accounts for small businesses. (For fuller descriptions of these plans, click the links to the relevant sections of Business Week frontier's Life Stages section in the text and the right-hand margin.) In both cases, employers' contributions are tax deductible. Employees only pay tax on any capital gains when they withdraw funds.

Both options have the advantage of simplified tax reporting and federal Employee Retirement Income Security Act (ERISA) requirements. The SEP-IRA imposes the least amount of reporting and compliance of the two plans, according to Coles.

Savings Incentive Match Plan for Employees: A Simple-IRA plan is for companies with fewer than 100 employees. You can set up Individual Retirement Accounts (IRAs) for each eligible employee though a discount brokerage firm, a bank, an insurance company, or other institution offering IRAs. Any employee who is expected to earn at least $5,000 during the current year and received income of $5,000 or more during either of the two prior years must be allowed to participate. There's no minimum number or percentage of participants, an advantage for very small companies.

You, the employer, can contribute in one of two ways: You can either match each participant's contribution — up to 3% of his or her salary, to a maximum of $6,000, or you can contribute 2% of each participant's salary, whether they contribute or not. (Click here for more details on Simple IRAs.)

Simplified Employee Pension plan: Creating a SEP-IRA plan also involves opening IRAs for each participating staffer. You must offer them to any non-union employee, 21 years old or over, who has earned at least $400 in three or more of the last five calendar years. In this plan, the employer can contributes 15% of each person's salary up to $30,000. The percentage must be the same for each employee. Employees may not contribute additional funds. There's no minimum number of employees even a sole proprietor can create one though you can't contribute as large a share of your income — the formula for calculating your contribution comes to less than 15%.

The SEP's advantages include flexibility — you don't have to contribute each year. A potential disadvantage is that even very part-time employees can participate, although that can be a good recruiting tool if you need steady part-timers. (Click here for more on SEPs.) Finally, any plan needs a money manager, generally a bank or other financial services company that offers investment options for plan participants. Most companies offer a choice of mutual funds.

You also need an administrator who handles reporting and compliance issues and communication with the money manager and employees. You can pay an independent company or professional to handle this.

Alternatively, your investment company can take charge of it, bundling the fee into its charges for managing the money. You may be able to administer the plan in-house if it's very small. Check with your pension advisor to make sure there aren't other legal restrictions that prevent you from doing this, Coles says.


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