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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. |
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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? |
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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.
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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.
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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.
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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.
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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.
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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).
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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.
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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.
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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.
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Here's a brief look at some plans that can
help you and your employees save.
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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.
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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.
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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.
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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).
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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.
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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.
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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.
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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.
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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/
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While more complex, 401(k) plans offer higher contribution
limits than SIMPLE plans and IRAs, allowing employees to
potentially accumulate greater savings.
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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).
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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.
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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.
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The following two pamphlets and other pension-related
publications are available on the Employee Benefits Security Administration
web
site:
These and other pension-related publications are also
available by calling EBSA's Toll-Free Employee & Employer
Hotline at: 1.866.444.EBSA (3272).
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For more information contact:
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