Weighing Retirement Plans

One of the most difficult challenges facing all businesses, large
or small, is dealing with employee benefits. After all, the mix of
benefits you devise can have a serious impact on your hiring
and employee retention, your general efficiency (because if you
have a high employee turnover, your workflow will likely suffer),
and your company's profitability.

Of the various types of benefits offered by employers, one of
the most critical to your employees is probably the retirement
plan. This is particularly true in today's economy, where employers
are feeling more and
more pressure to offer competitive
retirement plans
to their workforce. And
because employees tend to
be more mobile these days
and want to take retirement
plans with them when/if
they go, employers have to
offer a better mix of retirement-
plan options.
Whether you need to
assess your current plan or
you're evaluating the possibility of adopting a plan, it's important
that you consider all your options. To help you do so, I'll
address various plans here. Note that while some retirement
plans authorized by the IRS in past legislation continue to function,
they may no longer be adopted. For our purposes, I'll discuss
only the plan types that can still be adopted as new plans.

Individual retirement accounts
Three types of individual retirement accounts or IRAs are available.
The first is a Payroll Deduction IRA. Under this type of plan,
employees authorize the employer to deduct a specified amount
from their payroll check, which deposits directly into an IRA that
the employee has set up. The type of IRA can be either a traditional
IRA or a Roth IRA:

• A traditional IRA's contribution is tax deductible, either in
  whole or in part, depending on IRS limitations based on your
  adjusted gross income. The amounts earned in the employee's
  IRA are not taxable until they are distributed at a later eligible
  retirement date.
• The Roth IRA works just the opposite. The contribution is not
  tax deductible, but the distributions of earnings made at a later eligible
  date are not taxable as earnings.

The next type of IRA is a Simplified Employee Pension Plan
(SEP). This type of IRA plan allows employers to make contributions
directly into their employees' IRA accounts, as well as the
employer's own IRA account. Under this type of plan, only the
employer can contribute.

The last type of IRA is a Savings Incentive Match Plan for
Employees (SIMPLE IRA). This plan was developed for small
employers to set up salary-reduction contributions and add
matching contributions from the employer directly into the
employee's IRA account. Like the SEP, employers may also contribute
to their own IRA account.

401(k) plans
For small businesses, the 401(k) plan has become the most
widely accepted retirement savings plan. The 401(k) plan is
similar to a Roth IRA in that contributions are not taxed until distribution
at a later date.

They are, however, much more flexible with regards to the
amounts that can be contributed by an employee into their
account”? up to $14,000 in 2005 and $15,000 in 2006. Employers
can adopt various scenarios for matching on a percentage
basis or a fixed dollar amount (all done on a discretionary
basis), and can set up their own rules as to when an employee
vests in the employer contributions. Of course, all contributions
by the employee are immediately vested under the regulations.

If you are interested in establishing a 401(k) plan, it's wise to
typically enlist the help of a benefits expert or discuss your
options with a tax professional. While there are various ways to
set up a 401(k), if you establish a “prototype plan” as defined by
the IRS, your management fees will be significantly less and the
filing requirements by the IRS will be much simpler.

Profit-sharing and money-purchase plans
Under a profit-sharing plan, employers contribute to profit-sharing
plans on a discretionary basis. As implied in the title, the
contributions are made based on excess profits as deemed by
the employer. While the amount contributed is discretionary,
the plan must follow a set formula as to how the profits are distributed
each time amounts are contributed to the plan. As with
the 401(k) plans, you will save time and money by adopting a
“prototype plan” as set forth by the IRS.

A money-purchase plan, referred to as a “defined contribution
plan,” differs from other plans in that the employer makes
“pre-defined” contributions to the plan. For example, the plan
could require a 5% contribution of each eligible employee based
on the employee's pay. In that respect, it is not a discretionary
contribution; it is defined.

These types of plans can be advantageous because: they
can be held in addition to other retirement plans; they can be for
a business of any size; and they can be as simple or as complex
as you wish. Like the 401(k) and profit-sharing plans, there are
pre-approved money-purchase plans available that will save the
employer time and money in filing requirements. Limitations of
this type of plan are the lesser of 25% of compensation or
$42,000 in 2005.

Defined benefit plan
This is the most complex and costly type of retirement plan. For
this reason, the use of this type of plan has declined over the
past years as more flexible and less-expensive plans have
become available.

As implied in its name, this type of retirement plan guarantees
the employee a specific return upon retirement, usually as
a fixed dollar amount based on the employee's salary and service.
The advantages of this type of plan are that larger amounts
can be contributed (and therefore deducted) by the employer,
vesting can be immediate, the plan can be used as a tool for
early-retirement packages, and the future cash outlay is
known to the business because it is a fixed amount. The disadvantages
involve the high cost and complexity of maintaining
this type of plan.

Two good sources
Although I've only provided a brief synopsis of the primary types
of retirement plans available, you at least get a flavor of the
numerous choices offered. If you're seeking further research on
retirement plans, two good sources include: the IRS
(www.irs.gov/retirement/index.html) and the US Department of
Labor (www.dol.gov/dol/topic/retirement).

Marty McGhie ([email protected]) is VP finance/
operations of Ferrari Color, a digital-imaging center with Salt
Lake City, San Francisco, and Sacramento locations.