Employee - pensions, retirement, 401k, IRA's

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For the smaller groups out there -- <=3 employees and 1-2 docs -- any recommendations on employee pensions, retirement, 401k's, IRA's, etc for employees?

I know we can't all afford this "luxury", but if it is an option, what is the best way to go about it.

I checked into this last year with a company that helps docs do "flex plans" in the area -- and was told that it only made sense from a monetary standpoint if I had >=5 employees.

Any thoughts?

I get confused on all the various options -- some requiring me to match contributions from employees or some limiting how much I can put in based on what employees are putting in, some with high fees, etc.

Here are some thoughts on various options I've found...

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http://www.dol.gov/dol/topic/retirement/typesofplans.htm

Retirement Plans, Benefits & Savings

Types of Retirement Plans

DOL Web Pages on This Topic

The Employee Retirement Income Security Act (ERISA) covers two types of pension plans: defined benefit plans and defined contribution plans.

A defined benefit plan promises a specified monthly benefit at retirement. The plan may state this promised benefit as an exact dollar amount, such as $100 per month at retirement. Or, more commonly, it may calculate a benefit through a plan formula that considers such factors as salary and service — for example, 1 percent of average salary for the last 5 years of employment for every year of service with an employer. The benefits in most traditional defined benefit plans are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation (PBGC).

A defined contribution plan, on the other hand, does not promise a specific amount of benefits at retirement. In these plans, the employee or the employer (or both) contribute to the employee's individual account under the plan, sometimes at a set rate, such as 5 percent of earnings annually. These contributions generally are invested on the employee's behalf. The employee will ultimately receive the balance in their account, which is based on contributions plus or minus investment gains or losses. The value of the account will fluctuate due to the changes in the value of the investments. Examples of defined contribution plans include 401(k) plans, 403( plans, employee stock ownership plans, and profit-sharing plans.

A Simplified Employee Pension Plan (SEP) is a relatively uncomplicated retirement savings vehicles. A SEP allows employees to make contributions on a tax-favored basis to individual retirement accounts (IRAs) owned by the employees. SEPs are subject to minimal reporting and disclosure requirements. Under a SEP, an employee must set up an IRA to accept the employer's contributions. Employers may no longer set up Salary Reduction SEPs. However, employers are permitted to establish SIMPLE IRA plans with salary reduction contributions. If an employer had a salary reduction SEP, the employer may continue to allow salary reduction contributions to the plan.

A Profit Sharing Plan or Stock Bonus Plan is a defined contribution plan under which the plan may provide, or the employer may determine, annually, how much will be contributed to the plan (out of profits or otherwise). The plan contains a formula for allocating to each participant a portion of each annual contribution. A profit sharing plan or stock bonus plan include a 401(k) plan.

A 401(k) Plan is a defined contribution plan that is a cash or deferred arrangement. Employees can elect to defer receiving a portion of their salary which is instead contributed on their behalf, before taxes, to the 401(k) plan. Sometimes the employer may match these contributions. There are special rules governing the operation of a 401(k) plan. For example, there is a dollar limit on the amount an employee may elect to defer each year. An employer must advise employees of any limits that may apply. Employees who participate in 401(k) plans assume responsibility for their retirement income by contributing part of their salary and, in many instances, by directing their own investments.

An Employee Stock Ownership Plan (ESOP) is a form of defined contribution plan in which the investments are primarily in employer stock.

A Money Purchase Pension Plan is a plan that requires fixed annual contributions from the employer to the employee's individual account. Because a money purchase pension plan requires these regular contributions, the plan is subject to certain funding and other rules.

A Cash Balance Plan is a defined benefit plan that defines the benefit in terms that are more characteristic of a defined contribution plan. In other words, a cash balance plan defines the promised benefit in terms of a stated account balance. In a typical cash balance plan, a participant's account is credited each year with a "pay credit" (such as 5 percent of compensation from his or her employer) and an "interest credit" (either a fixed rate or a variable rate that is linked to an index such as the one-year treasury bill rate). Increases and decreases in the value of the plan's investments do not directly affect the benefit amounts promised to participants. Thus, the investment risks and rewards on plan assets are borne solely by the employer. When a participant becomes entitled to receive benefits under a cash balance plan, the benefits that are received are defined in terms of an account balance. The benefits in most cash balance plans, as in most traditional defined benefit plans, are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation (PBGC).

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http://www.dol.gov/ebsa/publications/easy_retirement_solutions.html

Easy Retirement Solutions for Small Business

This pamphlet constitutes a small entity compliance guide for purposes of the Small Business Regulatory Enforcement Fairness Act of 1996. This brochure does not constitute legal, accounting or other professional service. It is a joint project of the U.S. Department of Labor, the U.S. Small Business Administration and private-sector partners. Its publication does not imply endorsement of any co-sponsor's or participant's opinions, products or services.

Question: I'm a small employer, and I'm considering a retirement plan for my workers. But I don't want to do anything too complicated. Are there simple options for employers like me?

Starting a small business retirement savings plan can be easier than most business people think. There are a number of retirement options that provide tax advantages to both employers and employees.

Why save?

By starting a retirement savings plan, you will be helping your employees save for the future. Retirement plans may also help you attract and retain a qualified pool of employees and offer your business tax savings.

You will help secure your own retirement as well. What's more, you will be joining more than one million small businesses with 100 or fewer employees that offer workplace retirement savings plans.

Experts estimate that Americans will need 60 to 80 percent of their pre-retirement income - lower-income earners may need up to 90 percent to maintain their current standard of living when they stop working. So, now is the time to look into retirement plan options. As an employer, you have an important role to play in helping America's workers save.

A Few Pension Facts

Most private-sector retirement plans are either defined benefit plans or defined contribution plans. Defined benefit plans promise a specified benefit at retirement, for example, $100 a month at retirement. The amount of the benefit is often based on a set percentage of pay multiplied by the number of years the employee worked for the employer offering the plan. Employer contributions must be sufficient to fund the promised benefit.

Defined contribution plans, on the other hand, do not promise a specific amount of benefit at retirement. In these plans, employees or their employer (or both) contribute to employees' individual accounts under the plan, sometimes at a set rate (such as 5 percent of salary annually).

Small businesses may choose to offer a defined benefit plan or a defined contribution plan. Many financial institutions and pension practitioners make available both defined benefit and defined contribution "prototype" plans that have been pre-approved by the IRS.

This brochure focuses on a few of the defined contribution options - SIMPLE plans, SEPs, 401(k) plans, and payroll deduction IRAs. Other types of defined contribution plans include employee stock ownership plans and money purchase plans.

All retirement plans have important tax, business and other implications for employers and employees. Therefore, you may want to discuss any retirement savings plan with a tax or financial advisor.

Here's a brief look at some plans that can help you and your employees save.

SIMPLE - Savings Incentive Match Plans for Employees of Small Employers

This savings option for employers of 100 or fewer employees involves a type of individual retirement account (IRA) and is the result of the Small Business Job Protection Act of 1996.

A SIMPLE plan allows employees to contribute a percentage of their salary each pay check and to have their employer contribute also. Under SIMPLE plans, employees can set aside up to $6,000 each year by payroll deduction. Employers either match employee contributions dollar for dollar - up to 3 percent of an employee's wage - or make a fixed contribution of 2 percent of pay for all eligible employees.

SIMPLE plans are easy to set up - you fill out a short form to establish a plan and ensure that IRA accounts are set up for each employee. Much of the paperwork is done by the financial institution that handles SIMPLE plan accounts, however, and administrative costs are low.

Employers may choose either to permit employees to select the IRA to which their contributions will be sent, or to send contributions for all employees to one financial institution (which will forward contributions of employees who elect a different IRA).

Employees are 100% vested in contributions, decide how and where the money will be invested, and keep their IRA accounts even when they change jobs.

SEPs - Simplified Employee Pensions

A SEP allows employers to set up a type of individual retirement account - known as a SEP-IRA - for themselves and their employees. Employers must contribute a uniform percentage of pay for each employee, although they do not have to make contributions every year. Employer contributions are limited to the lesser of 15 percent of an employee's annual salary or $24,000. (Note: this amount is indexed for inflation and will vary). SEPs can be started by most employers, including those who are self-employed.

SEPs have low start-up and operating costs and can be established using a single quarter-page form. And you decide how much to put into a SEP each year - offering you some flexibility when business conditions vary.

401(k) and Profit-Sharing Plans

401(k) plans have become a widely-accepted retirement savings vehicle for small businesses. Today, an estimated 25 million American workers are enrolled in 401(k) plans that hold total assets of about $1 trillion.

Employees contribute a percentage of their pay to the 401(k) plan on a tax-deferred basis through payroll deductions. The maximum amount an employee can deposit is $10,000. (Note: This amount is adjusted for inflation and will vary.) Employers also may contribute to an employee's 401(k) account by making employee contributions usually up to a percentage of an employee's pay/

While more complex, 401(k) plans offer higher contribution limits than SIMPLE plans and IRAs, allowing employees to potentially accumulate greater savings.

Employers also may make profit-sharing contributions to a plan that are unrelated to any amounts an employee chooses to contribute. The amount of these contributions is often set as a percentage of employees' pay; however, the employer can change the percentage or amount from year to year. A plan may combine these profit-sharing contributions with 401(k) contributions (and matching contributions).

Payroll Deduction IRAs

Even if an employer does not want to adopt a retirement plan, it can allow its employees to save through payroll deduction, providing a simple and direct way for eligible employees to contribute to an IRA through payroll deductions, providing a simple and direct way for eligible employees to save. The decision about whether to contribute, and when and how much to contribute to the IRA (up to $2,000) is always made by the employee in this type of arrangement.

Many individuals eligible to contribute to an IRA do not. One reason is that some individuals wait until the end of the year to set aside the money and then find that they do not have sufficient funds to do so. Payroll deductions allow individuals to plan ahead and save smaller amounts each pay period. Payroll deduction contributions are tax-deductible by an individual to the same extent as other IRA contributions.

Find Out More

The following two pamphlets and other pension-related publications are available on the Employee Benefits Security Administration web site:

Simplified Employee Pensions (SEPs) - What Small Businesses Need to Know

Savings Incentive Match Plans for Employees of Small Employers (SIMPLE) - A Small Business Retirement Savings Advantage

These and other pension-related publications are also available by calling EBSA's Toll-Free Employee & Employer Hotline at: 1.866.444.EBSA (3272).

For more information contact:

U.S. Chamber of CommerceBusiness Information and DevelopmentTel

Small Business AdministrationAnswer DeskTel 1.

=====================================================================================http://www.dol.gov/ebsa/publications/simple.html

SIMPLE IRA Plans For Small Businesses

Thinking about a retirement plan? If it seems like the right thing for your business, here’s a SIMPLE one.

A SIMPLE (Savings Incentive Match Plan for Employees of Small Employers) IRA plan offers great advantages for businesses that meet two basic criteria. First, your business must have 100 or fewer employees (who earned $5,000 or more during the preceding calendar year). In addition, you cannot currently have another retirement plan. If you are among the thousands of business owners eligible for a SIMPLE IRA plan, read on to learn more.

A SIMPLE IRA plan provides you and your employees with a simplified way to contribute toward retirement. It reduces taxes and, at the same time, attracts and retains quality employees. And compared to other types of retirement plans, SIMPLE IRA plans offer lower start-up and annual costs … they are just simpler to operate.

Other Advantages of a SIMPLE IRA Plan:

SIMPLE IRA plans are easy to set up and run – your financial institution handles most of the details.

Employees can contribute, on a tax-deferred basis, through convenient payroll deductions.

You can choose either to match the employee contributions of those who decide to participate or to contribute a fixed percentage of all eligible employees’ pay.

You may be eligible for a tax credit of up to $500 per year for each of the first 3 years for the cost of starting a SIMPLE IRA plan. (IRS Form 8881, Credit for Small Employer Pension Plan Startup Costs).

Administrative costs are low.

You are not required to file annual financial reports.

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http://www.dol.gov/ebsa/publications/401kplans.html

401(k) Plans For Small Businesses

Why 401(k) Plans?401(k) plans can be a powerful tool in promoting financial security in retirement. They are a valuable option for businesses considering a retirement plan, providing benefits to employees and their employers. Employers start a 401(k) for a host of reasons.

A well-designed 401(k) plan can help attract and keep talented employees.

It allows participants to decide how much to contribute to their accounts on a before-tax basis.

Employers are entitled to a tax deduction for their contributions to employees’ accounts.

A 401(k) plan benefits a mix of rank-and-file employees and owner/managers.

The money contributed may grow through investments in stocks, mutual funds, money market funds, savings accounts, and other investment vehicles.

Contributions and earnings generally are not taxed by the Federal government or by most State governments until they are distributed.

A 401(k) plan may allow participants to take their benefits with them when they leave the company, easing administrative burdens.

Beginning in 2006, 401(k) plans may be established or amended to permit employees to designate some or all of their contributions (employee deferrals) as Roth contributions. These contributions are made on an after-tax basis, but distributions (including earnings) are tax-free (if certain conditions are met).

This booklet highlights some of a 401(k) plan's advantages, some of your options and responsibilities as an employer operating a 401(k), and the differences among the types of 401(k) plans. For more information, a list of resources for you and for prospective 401(k) participants is included at the end of this booklet.

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http://www.dol.gov/ebsa/publications/SEPPlans.html

SEP Retirement Plans For Small Businesses

Looking For An Easy, Low-Cost Retirement Plan? Why Not Consider A SEP?

Simplified Employee Pension plans (SEPs) can provide a significant source of income at retirement by allowing employers to set aside money in retirement accounts for themselves and their employees. Under a SEP, an employer contributes directly to traditional individual retirement accounts (SEP-IRAs) for all employees (including the employer). A SEP does not have the start-up and operating costs of a conventional retirement plan and allows for a contribution of up to 25 percent of each employee’s pay.

Advantages Of A SEP

Contributions to a SEP are tax deductible and your business pays no taxes on the earnings on the investments.

You are not locked into making contributions every year. In fact, you decide each year whether, and how much, to contribute to your employees’ SEP-IRAs.

Generally, you do not have to file any documents with the government.

Sole proprietors, partnerships, and corporations, including S corporations, can set up SEPs.

You may be eligible for a tax credit of up to $500 per year for each of the first 3 years for the cost of starting the plan.

Administrative costs are low.

As you read through this booklet, here are some definitions you will find helpful:

Employee – An “employee” is not only someone who works for you, but also may be a self-employed person as well as an owner-employee who has earned income. In other words, you can contribute to a SEP-IRA on your own behalf. The term also includes employees of certain other businesses you and/or your family own and certain leased employees.

Eligible Employee – An eligible employee is an employee who:

Is at least 21 years of age, and

Has performed service for you in at least 3 of the last 5 years.

All eligible employees must participate in the plan, including part-time employees, seasonal employees, and employees who die or terminate employment during the year.

Your SEP may also cover the following employees, but there is no requirement to cover them:

Employees covered by a union contract;

Nonresident alien employees who did not earn income from you;

Employees who received less than $500 in compensation during the year (subject to cost-of-living adjustments).

Compensation – The term generally includes the pay an employee received from you for a year’s work. As the owner/employee, your compensation is the pay you received from the company. Employers must follow the definition of compensation included in the plan document.

Locke, MD