Simplified Employee Pension (SEP) Plan
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401(k)
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Savings Incentive Match Plan for Employees (SIMPLE) IRA
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Profit Sharing Plan
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Money Purchase Plan
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Simplified Employee Pension (SEP) Plan
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If a business doesn't currently employ anyone, how can the employer benefit from a Simplified Employee Pension (SEP)?
A business owner can use a SEP to contribute more than an individual IRA allows. The company contribution can be deducted on the employer's business tax return, and all earnings attributed to contributions are tax deferred as long as they remain in the company's retirement plan.
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Is it time-consuming to establish and maintain a Simplified Employee Pension (SEP)?
A SEP plan is one of the easiest retirement programs to establish and maintain. An employer makes contributions directly into the individual retirement accounts of each eligible employee. There are no complicated tax forms to complete and no required annual IRS plan-level filings, which may exist with other retirement plans.
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What if a business can't make a contribution to the Simplified Employee Pension (SEP) every year?
Not a problem. The SEP plan offers maximum funding flexibility, which allows business owners to decide from year to year whether to make a contribution to the plan. An employer may contribute up until the business's tax filing deadline (plus any extensions) for a prior-year tax deduction.
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Must an employer contribute to the Simplified Employee Pension (SEP) for all employees?
No, an employer must include only eligible employees in a SEP plan. To be eligible, employees must be at least 21 and have performed service for the business during three of the last five years. However, the business owner may establish more liberal eligibility requirements in order to include more employees.
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How much can a business contribute to a Simplified Employee Pension (SEP) each year?
Up to 15% (no more than $25,500 for 2001 and $30,000 for 2002) of each eligible employee's salary.* The percentage may vary each year, but in any given year the contribution percentage must be the same for all eligible employees.
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*Based on compensation limit of $170,000 for 2001 and $200,000 for 2002.
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401(k)
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What's a 401(k) plan?
A 401(k) plan is a tax-qualified retirement plan that allows employees to invest for retirement with pre-tax contributions that defer part of their pay. A 401(k) plan may allow the employer to make tax-deductible contributions to encourage plan participation.
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What are the tax advantages of a 401(k) plan?
Employees who participate in a 401(k) plan can reduce their current taxable income by making contributions on a pre-tax basis. The plan also reinvests money earned on the investments tax deferred. This tax-deferred compounding gives the employee's account the potential to grow much faster than it would in a regular taxable account. Any employer contributions and plan administrative expenses are generally tax deductible to the employer. (Consult a tax adviser for details.)
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Why do small businesses typically adopt a 401(k) plan?
There are several reasons. Businesses may be looking for a way to attract and retain employees or enhance their benefit plans by helping employees set up a financial plan for retirement. Sometimes businesses are simply looking for the tax deduction they receive for contributions to the plan.
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Who can establish a 401(k) plan?
Any sole proprietor, partnership or corporation and certain nonprofit organizations can establish a 401(k) plan. State and local governments are prohibited from adopting 401(k) plans, but there are other types of retirement plans that may meet their needs.
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Can a small business change 401(k) plan providers?
Yes. A small business that already has a 401(k) plan can choose to move the plan to another provider.
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Must all employees contribute to the 401(k) plan?
No. While employees who are eligible to participate under the 401(k) plan must be given the right to participate, they are not obligated to contribute to the plan.
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Are company matching contributions required as part of a 401(k) plan?
No, matching contributions are optional. However, many employers choose to incorporate a matching-contribution provision in the plan. They usually do this to attract and retain employees, to remain competitive with industry standards, to encourage eligible employees to participate in the plan and for tax benefits.
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When are employees vested in a 401(k) plan?
Employees are always vested in, or entitled to, the amounts they contribute to the plan. An employee may also be entitled to all or a portion of any contribution made by the employer, depending on the vesting schedule adopted by the employer. Companies may require employees to complete a certain number of years of service with the employer before employer contributions become fully theirs. Some plans provide for a graduated vesting schedule, so that the employee can earn the right to a portion of their employer contributions as they complete a specified number of years of service.
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How much can an eligible employee contribute to a 401(k) plan?
An eligible employee may generally contribute anywhere from 1% to 20% of salary. The 2001 pre-tax limit for contributions is $10,500; for 2002, the limit is $11,000, increasing each subsequent year until reaching $15,000 in 2006. Then it will increase with indexing (in $500 increments) after 2006. Beginning in 2002 plan participants who are age 50 or older (by 12/31 of the relevant plan year) can make pre-tax "catch-up contributions" in addition to regular contributions. For 2002, the catch-up limit is $1,000, increasing each subsequent year until $5,000 in 2006. Then it will increase with indexing in $500 increments after 2006.
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Note: There are other sections of the Internal Revenue code that may further reduce the amount an eligible employee may contribute to the plan.
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How can participants get money out of their 401(k) account?
Generally, there are "distribution events" that are common to most plans: retirement, separation from service, death and permanent disability. In these situations the participant or the beneficiary may receive distributions from the plan. Many plans have additional ways to provide the participant access to plan funds, such as loan provisions, hardship distributions and age 59½ in-service distributions. Be aware, however, that there are restrictions and/or tax consequences for most distributions. Taking a distribution prior to retirement means the loss of tax-deferred growth potential on that amount.
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Savings Incentive Match Plan for Employees (SIMPLE) IRA |
Which employees can participate in a Savings Incentive Match Plan for Employees (SIMPLE) IRA?
Employers who offer a SIMPLE IRA plan must make it available to all employees who expect to earn at least $5,000 in compensation during the calendar year and have earned at least $5,000 with that employer in any two preceding calendar years. An employer may decide to set less restrictive requirements, making the plan available to more employees. Employee participation is voluntary.
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How much of an employee's pre-tax compensation can s/he invest in a Savings Incentive Match Plan for Employees (SIMPLE) IRA?
Employees can choose to invest up to 100% of compensation, up to a maximum of $6,500 per year for 2001. For 2002, the limit is $7,000. This limit increases each subsequent year until it reaches $10,000 in 2005. After 2005 it will increase with indexing in $500 increments. Beginning in 2002, SIMPLE IRA plan participants who are age 50 or older by the end of the year can make catch-up contributions on a pre-tax basis.
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How much must an employer contribute to the Savings Incentive Match Plan for Employees (SIMPLE) IRA?
Participating employers are required to make contributions each year and can do so in one of two ways. They can:
- Match the contributions of each participant dollar for dollar, up to 3% of his or her annual compensation (not to exceed $6,500 for 2001 and $7,000 for 2002). Under this method, employers can generally reduce their contribution to 1% for any two years in a five-year period as long as:
- A 3% funding level is maintained in three out of five years and
- Eligible employees are notified in writing of any contribution reductions a reasonable period before the election period for the employees' contributions
- Contribute 2% of each eligible employee's annual compensation, up to a maximum of $3,400 for 2001 and $4,000 for 2002.*
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Based on eligible compensation of $170,000 for 2001 and $200,000 for 2002.
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What's the deadline for establishing and funding a Savings Incentive Match Plan for Employees (SIMPLE) IRA?
Employers wishing to establish a SIMPLE IRA must give their employees 60 days' advance notice before deferrals may begin. Employers who want to establish their plan for the current tax year may do so any time from January 1 through October 1. If notice is given after October 1, the plan will be established for the following calendar year. Employers must contribute by the due date for business tax returns, including extensions. Employee pre-tax contributions must be invested as soon as possible after being withheld from the employee's pay during the year. Employees can generally make the decision to invest a portion of their pre-tax compensation during the plan's annual 60-day enrollment period.
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Are Savings Incentive Match Plan for Employees (SIMPLE) IRA plan participants allowed to contribute to a Traditional or Roth IRA?
Yes, subject to the Traditional IRA and Roth IRA deduction rules and limits, including those that apply to retirement plan active-participation guidelines. An employer cannot maintain any other employer-sponsored retirement plan for any tax year in which the SIMPLE IRA is maintained, unless the other plan is for employees covered by a collective bargaining agreement.
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Profit Sharing Plan |
What's the deadline for establishing and funding a Profit Sharing Plan?
Employers may establish a plan at any time. In order to receive a current-year tax deduction, the employer must establish the plan prior to December 31 or prior to the end of the company's fiscal year. However, the employer has until the company's tax filing deadline, including extensions, to fund the plan.
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How much can an employer contribute to a Profit Sharing Plan each year?
The employer makes all contributions. For 2001, IRS rules permit employers to contribute up to the lesser of 15% or $35,000, and for 2002, the lesser of 100% of compensation or $40,000 per eligible participant.
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Note: An employer should consider the limitations on deductions for plan contributions before determining contribution amounts for its plan(s).
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Must an employer contribute to a Profit Sharing Plan each year?
Depending on plan provisions, employers can decide each year whether or not to make a contribution and how much to contribute. Although contribution amounts may vary each year, contributions should be "substantial and recurring," according to IRS guidelines.
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Which employees must an employer include when making a Profit Sharing contribution?
Generally, employers must cover all employees who are at least 21 and have worked for the company for at least one year. An employer may decide to set less restrictive requirements in order to make the plan available to more employees.
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Money Purchase Plan |
What's the deadline for establishing and funding a Money Purchase Plan?
Employers may establish the plan at any time. In order to receive a current year tax deduction, the plan needs to be established prior to December 31 or prior to the end of the company's fiscal year. However, employers may fund the plan until the company's tax-filing deadline, including extensions.
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How much can an employer contribute to a Money Purchase Plan each year?
The employer makes all contributions. For 2001, IRS rules permit employers to contribute up to the lesser of 25% or $35,000, and for 2001, the lesser of 100% of compensation or $40,000 per eligible participant.
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Note: An employer should consider the limitations on deductions for plan contributions before determining the contribution formula for its plan(s).
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Must an employer make an annual contribution to the Money Purchase Plan?
Yes, employers must make a contribution for each eligible employee each year and contributions must be the same percentage of compensation. The employer chooses the contribution percentage when it adopts the plan.
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Which employees must an employer include when making a Money Purchase contribution?
Generally, employers must cover all employees who are at least 21 and have worked for the company for at least one year. Employers may decide to set less restrictive requirements in order to make the plan available to more employees.
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