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.

Record keeping.

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