by: Roxanne Fleszar
from: 401kWire
April 26, 2000
Competing with "the big guys" has never been easy for the small business
employer with 100 employees or less, and this holds true on the retirement
plan front. Small businesses can't compete with the intricate defined
contribution and defined benefit plans used by large companies to woo new
employees. But this doesn't mean small businesses should be out of the
race altogether. On the contrary, although benefits may not match
apples-to-apples, the availability of a retirement plan will bear weight
in a prospective employee's decision.
Consider this: the advent of the 401(k) plan, which put retirement
planning and saving into the hands of employees; the problems plaguing
Social Security; and easy access to a plethora of information via the
internet have unintentionally joined forces to catapult retirement
planning issues into the mainstream. As a result, prospective employees
now weigh a company's retirement plan offerings as heavily as they may
other popular benefits, such as health care and time-off policies.
Bring in the Candidates
There are options available to small businesses, yet many employers are
apparently unaware of them. The results of the 2000 Small Employer
Retirement Survey (SERS), conducted by the Employee Benefit Research
Institute (EBRI), the American Savings Education Council (ASEC), and
Mathew Greenwald & Associates (MGA) reveal that one-third of respondents
not currently offering a plan are unfamiliar with the Savings Incentive
Match Plan for Employees (SIMPLE), and 54% are unfamiliar with the
Simplified Employee Pension (SEP).
The SEP, created by the Revenue Act of 1978, is essentially an IRA to
which an employee and/or his employer can make contributions. SEPs are
effective for small businesses because they require very little
administrative work and no fiduciary responsibility for the employer. The
ease at which a SEP can be instituted and administered makes it the best
choice for companies of 10 or fewer employees. Employer contributions are
based on a percentage of salary, and there are no top-heavy rules, so it
is an excellent alternative for the self-employed business owner. Since
the SEP requires inclusion of all employees working 300 or more hours per
year, it is not an option for employers wishing to compensate only
full-time workers.
Key points regarding SEPs are:
· employer contributions are not included as income,
· participants are 100% vested upon eligibility,
· contributions to a SEP cannot be combined with other IRA contributions,
and
· SEP balances are not transferable to the defined contribution plan of a
future employer.
An alternative, the SIMPLE plan can be administered as either an IRA or a
401(k). The IRA version is more beneficial to employers, as the 401(k)
retains much of the administrative paperwork headaches of its traditional
counterpart.
While a SIMPLE IRA involves no installation or administrative fees,
employers must commit to matching each employee's salary reduction
contribution, to a maximum of 3% of the employee's annual compensation.
One pitfall of a SIMPLE plan may be that contribution limits are currently
capped at $6,000 annually, a figure which has not increased in four years.
Additional key points of the SIMPLE IRA are:
· it lacks significant portability, as it can only be rolled over to
another SIMPLE IRA,
· all contributions are immediately 100% vested, and
· funds can be withdrawn by the employee without limitations by the
employer.
Of course, nothing is stopping the small business employer from installing
a traditional 401(k) plan. Although the traditional 401(k) typically will
be more expensive to maintain, the flexibility of 401(k) plan options,
such as vesting, matching contributions, loans, etc., can all work to
customize an affordable and effective plan for the employer. Paperwork can
also be reduced if using the 401(k) safe harbor provision, in which the
employer can eliminate ADP and ACP nondiscrimination testing by committing
to a 3% non-elective contribution.
To determine which is the best retirement plan for your small business,
employers should first draft a budget and a list of plan goals. Armed with
this information, schedule a joint meeting with a qualified retirement
plan advisor and/or third party recordkeeper. Working together, the
advisor(s) can layout all the specifics of each type of plan and recommend
the best one for your company's needs, and can project estimated annual
costs for each plan being considered.
Reap the rewards
Implementing a company retirement plan may reap several benefits for your
business. For instance, the 2000 SERS states that nearly half of all small
businesses currently offering a retirement plan report that the plan has
had a major impact on attracting and retaining good employees, while an
additional 40% report a minor impact in this area. In addition, the plan
creates a new tax-deferred avenue for both you and your employees. After
all, the $2,000 annual limit on traditional and Roth IRA's won't land
anyone in a comfortable retirement.