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SPECIAL REPORT ENTERPRISE: Finance: Employee Benefits
TABLE: A Retirement Plan Primer for Small Business
PENSION PLAN DESCRIPTION
SIMPLIFIED EMPLOYEE Popular among the smallest companies. Employer
PENSIONS (SEP) contributes to IRA of employees with effective
annual contribution limit of $22,500 per em-
ployee. Plan vests (becomes wholly owned by
employee) immediately. Employee can continue to
make regular $2,000 IRA contribution. PROS:
Simple and inexpensive. CONS: Difficult to ex-
clude part-time employees.
SALARY REDUCTION An SEP with a salary-reduction feature. Employee
(SARSEP) deferrals of up to $9,240 may not be counted as
compensation by IRS. Only available to companies
with no more than 25 eligible employees, and at
least 50% must elect to participate. PROS: Same
as for a SEP. CONS: Salary deferrals to highly
compensated employees limited by the amounts
deferred by low-paid workers.
PROFIT-SHARING A discretionary contribution formula. Effective
annual contribution capped at $22,500. Contrib-
utions limited to no more than 15% of employees'
compensation. Variable vesting. PROS: Very
flexible plan. Loans and hardship withdrawals may
be permitted. CONS: Annual reporting requirements.
Employer can have fiduciary responsibility. Greater
cost to set up and administer.
401(k) A profit-sharing plan with a salary-reduction
feature. An employee may defer up to $9,240 per
person for 1995. Employer may match employee
deferrals. Aggregate employer contributions lim-
ited to 15% of employee compensation. PROS: Same
as profit-sharing. CONS: Same as profit-sharing.
MONEY PURCHASE A fixed-contribution formula. Employer contrib-
utions limited to 25% of employee compensation.
Flexible vesting. PROS: Attractive for employers
wanting to contribute more than 15% of employee
compensation. May be paired with profit-sharing
plan for maximum flexibility and contribution.
CONS: Same as profit-sharing. Also, distribution
rules have several specific requirements.
DATA: MATTHEW R. LUOMA OF JANUS CAPITAL CORP., BUSINESS WEEK