Alan S. Moore / L’Observateur / July 26, 2000

A tax-qualified retirement plan offers employees an attractive means of saving for retirement and is an effective way for employers to get tax benefits. Unfortunately, small businesses don’t always offer theiremployees any retirement plan at all due to the common misconception that such plans come with high costs and heavy administrative demands.

Instead, employers may encourage their employees to establish Individual Retirement Accounts (IRAs).

But IRAs alone aren’t always enough to help these employees retire comfortably, and small businesses are in danger of losing employees to larger businesses which offer more attractive benefits packages.

In order to attract and retain valuable employees, many small businesses may want to consider offering employees a Simplified Employee Pension (SEP IRA), SIMPLE IRA, Profit Sharing Plan or Money Purchase Pension Plan. These plans are relatively simple for the employer to establish andoperate, and they need not overextend the resources of a small business.

Employees enjoy a vehicle for tax-deferred growth of assets and are provided with a tool to help them achieve retirement security.

The Simplified Employee Pension IRA, or SEP IRA, is very popular in the small business community because employer contributions are fully discretionary each year, and employers may take a tax deduction for the amount contributed on behalf of each employee. The contribution, if any,is not taxable to the participants until withdrawn. The self-directed SEPIRA offers employees the ability to accumulate more assets than possible through a Traditional IRA and to choose investments that meet their specific retirement needs.

The SIMPLE IRA, designed for companies with 100 or fewer employees, is a salary deferral plan structured to eliminate many of the complex administrative requirements often associated with 401(k) plans. TheSIMPLE plan allows for employee salary deferral contributions of up to the lesser of $6,000 or earned income, made on a pre-tax basis. The requiredemployer contribution can take the form of either a 3 percent match or a 2 percent non-elective contribution. While the burden of funding the plan isshared by employer and employee, the employer gets a tax deduction for the entire amount contributed on behalf of each employee. Investmentearnings accumulate tax-deferred until distributed from the plan.

The Profit Sharing Plan is a qualified retirement plan that allows for discretionary tax-deductible contributions of up to 15 percent of total compensation paid to all eligible employees. All contributions are made bythe employer and the percentage contributed can vary from year to year.

With this plan, the employer retains the flexibility of excluding some part-time workers while the employee enjoys an employer-funded benefit plan that offers the possibility to accumulate significantly more assets on a tax-deferred basis than through a Traditional IRA.

A Money Purchase Pension Plan is a qualified retirement plan established by an employer to allow for a tax-deductible contributions of up to 25 percent of each participant’s total compensation. Employers thus benefitfrom the ability to contribute a greater percentage of compensation than is available in most other plans – an attractive advantage for the employer who may be attempting to maximize the dollars contributed on his or her own behalf. Like the Profit Sharing Plan, this plan allows theemployer to retain the flexibility of excluding some part-time workers and the employee to enjoy an employer-funded benefit plan that offers the ability to accumulate significant assets on a tax-deferred basis.

As you can see, there are many options for small business owners looking to provide a tax-deferred, employer-sponsored qualified plan. Byestablishing a retirement plan, you can effect a dramatic difference in tomorrow’s standard of living for yourself and your employees.

ALAN S. MOORE, who writes this column every Wednesday forL’Observateur, is a financial advisor of Legg Mason Wood Walker, Inc., adiversified securities brokerage and financial services firm that is a member of the New York Stock Exchange, Inc.

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