A Simplified Approach to Retirement Benefits for Small Business
Agency Sales Magazine (02/02) Vol. 32, No. 2 p.22; O'Malley, Scott E.

Providing retirement benefits has traditionally been viewed as complicated by small employers, not only because of the intricate reporting required by the Internal Revenue Service (IRS) and the Department of Labor, but also because of the labor and time costs associated with administering and maintaining the plan. In response to the needs of small-business owners, Congress developed the Simplified Employee Pension (SEP) plan in 1978, an IRA that requires no IRS or Labor Department filings from the employer and puts the maintenance and fiduciary responsibilities of the accounts on the employees and not the business owner. As of 2000, SEP allows the business owner to make a discretionary tax-deductible contribution of a maximum of 15 percent of compensation or $25,000 (which ever is less) for himself and each eligible employee, which can be adjusted annually or skipped altogether. Two basic rules apply to the SEP-IRA: (1) employers must contribute the same percentage to workers' plans as they do to their own, and (2) contributions must be made on behalf of all eligible employees who are 21 years or older and have worked three of five years as covered under the terms of the plan. Other benefits from SEP include employees aged 59 1/2 and 70 1/2 and older can make penalty free withdrawals from their accounts as easy as they can from IRAs, and investment flexibility extends to bonds, stocks, mutual funds, etc. Employers of 25 workers or less can choose an option for cash deferred plans as well, called CODA-SEPs, through salary reduction schedules which shift part of the costs of rising retirement needs to the employee. Finally, SIMPLE, (Savings Incentive Match Plan for Employees), designed for firms with 100 or fewer employees, comes in either an IRA form wherein contributions are made to the accounts established on behalf of employees, or as part of a 401(k) plan.

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