Napier & Company, LCC

With possible changes in Social Security looming, savvy employees will be looking harder for jobs that provide some retirement benefits. This does not have to be a daunting thought. There are many available alternatives for small businesses that are relatively inexpensive to set up and administer. This article will give you a summary of the options available based on 2005 requirements. The best plan for your company will depend on many factors including number of employees and the amount you would like to contribute for yourself. In order of simplicity the current options available are:

 

If you have just a few employees and want a plan that is truly low cost and low maintenance, this is the plan for you. The plan is funded with tax-deductible employer contributions (employees can not contribute) and all eligible employees must be covered. The wage requirement is low so this plan works well for a company with many part time workers.

With this plan there is no “plan document” and no annual filings with the IRS. Contributions do not have to be made every year, so if you have a low income year you are not locked into a required contribution

The annual contribution limit is 25% of compensation (if you’re an employee of your own corporation) up to $42,000 or 20% of self-employment income up to $42,000. Vesting is immediate.

 

This plan is good for your employees. They can make their own contributions and an employer match is required. You will not be able to contribute as much for yourself. For 2005, contributions are limited to $10,000 ($12,000 if you are over 50) plus the employer match for up to 3% of your salary. Vesting is immediate. This plan is also good for small employers who want to provide a benefit to part time employees.

 

This is a plan for sharing your business profits with your employees. Employees cannot contribute to this plan. Since your company’s performance will vary from year to year, the contributions will also vary. The plan does not need to provide a definite formula for figuring the profits to be shared but, if there is no formula, there must be systematic and substantial contributions. Allocation of contributions between participants must also be defined. This kind of plan requires a written plan and annual filings. Hiring a professional to administer this will be required.

Eligible employees must work at least 1000 hours annually and vesting is determined by the employer. The yearly contribution is 25% of salary (20% of self-employment income) up to $42,000.

 

This plan includes a cash or deferred arrangement under which participants can choose to have you contribute part of their before-tax compensation to the plan rather than receive the compensation in cash. This kind of plan will require a written plan document and a administrator, so will be more expensive to set up and maintain.

Eligible employees must work a minimum of 1000 hours per year and vesting is determined by the employer. The annual combined employer and employee contribution cannot exceed $42,000($46,000 for those over 50). The employer is not required to provide a matching contribution.

 

This plan, though expensive to administer and not very flexible, can be a good choice in some situations. If you are in your 50s and want to retire within 10 years but haven’t saved much so far, this could be the plan for you. You can contribute enough to give you an annual retirement payout of $170,000 or 100% of the average of your three highest consecutive pay years. You will need an actuary to make this calculation.

Employees cannot contribute to this type of plan and vesting is determined by the employer (usually a long vesting period). A plus for employees is that they are guaranteed a set payout after retiring.

 

You can see that there are plans available for all size companies and budgets. The IRS also offers the incentive of a Credit for Startup Costs. The credit equals 50% of the cost to set up and administer the plan and educate employees about the plan. The maximum credit is $500 per year for each of the first three years of the plan.

 

This article provides only the most basic information about the retirement options available. Please contact our office so that we may help you choose and implement the best retirement plan for your company and personal situation.