Retirement Funds and Your Small Business

Cost-effective ways to offer employees a much-needed benefit

With the current economic environment, many entrepreneurs believe they can’t afford to give their employees retirement benefits. In fact, only 26% of small business owners offer any retirement plan, according to a recent poll sponsored by ING Direct’s Sharebuilder 401(k) program.

But, offering a retirement package can help attract talent, which is crucial to business success. “Any time an employer adds to a benefits package, it’s definitely going to help with retention,” says Isaiah McGee, an employer consultant in Waukee, Iowa. “It shows the company values its employees.”

Fortunately, SEP-IRAs and even 401(k) retirement plans can be cost-effective options for employers.  Here’s what entrepreneurs need to know about them:

SEP-IRAs
A Simplified Employee Pension Individual Retirement Account, or SEP-IRA, is an arrangement where an employer of any size, including a self-employed individual, can make contributions for their eligible employees.

A major advantage of SEP-IRAs is that employers can adjust contributions based on the success of their business. If the company is having a slow sales year, employers can contribute a smaller (or zero) amount into their employee’s accounts. If the company has a better year, employers can give a larger contribution. Employers can generally contribute up to 25% of the employee’s compensation (with a maximum of $46,000 in 2008, subject to certain IRS conditions). Fairness is required–the contribution percentage must be the same for all workers. Also, employees don’t contribute, only employers can.

To establish a SEP-IRA, contact your preferred bank, insurance company, or other qualified financial institution. Enrollment requirements are minimal.  “There’s a form you complete (with tax information for the business and employees) that you submit.  The process takes maybe half an hour,” says Brooke Stephens, author of Wealth Happens One Day at a Time. Along with employer contributions, administration fees are typically less than $100 annually. For more information on SEP-IRAs, download Publication 560 at IRS.gov.

401(k) Plans
Employer sponsored 401(k) retirement savings plans are popular with large companies, but small businesses and solo entrepreneurs can also take advantage of them. Workers contribute to the plan from their own compensation, and the employer can choose whether or not to add matching contributions. Companies can offer a tax-deferred 401(k) and even a Roth 401(k). The latter lets employees save after-tax funds without maximum income limitations.

These plans generally have higher start-up administration costs (from around $100 to $400) and ongoing expenses (from around $10 to $250 per year), but when compared with SEP-IRAs, participants are usually allowed to shelter more money at lower income levels.

“There are incentives in place to help small businesses start a 401(k),” says Stuart Robinson, general manager of ING Direct’s Sharebuilder 401(k) program. “The government allows for (up to) a $500 tax credit, if it’s the first 401(k) plan for your business, for the first three years of the plan.” See Publication 560 for details and restrictions.

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