Corporate downsizing can force many one-time corporate employees to seek out alternate employers: themselves. Many of these new entrepreneurs ensure that they provide themselves with some of the benefits they enjoyed as employees; however, they tend to focus on the benefits that satisfy their current needs, such as medical and dental. Establishing a retirement fund is just as important. 

If you are hesitant about establishing a retirement plan for your business, consider this: studies show that most individuals will need 60-80% of their pre-retirement income to maintain their current standard of living. So while it may be somewhat of a current financial burden, the opportunity costs are worthwhile. You should also bear in mind that, by taking a deduction for plan contributions on your business's income-tax return, you get a tax break for the amounts that you use to fund the retirement plan. (To read more about small business retirement plans, see 401(k) Plans For The Small-Business Owner.)

Choosing a Plan
The types of retirement plans available to employers vary in complexity, features, and benefits. As a small business owner, you want to ensure that the plan you choose not only suits your business profile but also your financial profile. For example, if you operate a business that has a high rate of employee turnover, you may want to adopt a plan that allows you to have a vesting schedule for your contributions. This will ensure that employees work for a number of years before they become eligible to take plan contributions with them if they decide to leave your company. And if your business income fluctuates or is newly established you, may want to establish a profit sharing plan or SEP IRA where contributions are discretionary, and therefore need not be funded during your more financially challenging years.

As an employer, you have a variety of options for choosing a retirement plan. Your choice may be determined not only by the amount of contribution desired, but also by other factors such as the complexity of administration, features & benefits that may be made available under the plan, and funding responsibility. Plans such as SEP IRAs and profit-sharing plans are funded only with employer contributions, while SIMPLE IRAs and 401(k) plans are generally funded with employer contributions as well as employees' salary-deferral contributions. Some employees prefer plans to which they can make salary-deferral contributions. These plans give employees some security in knowing that they can contribute to their retirement fund even in years when the employer may not be able to fund the plan.

IRA-Based Plans
Because they are easy to explain to employees and require minimum administration, IRA-based plans are the most popular among newly established employers.

SEP IRA
The Simplified Employee Pension (SEP) is an IRA-based employer plan. Should you decide to adopt a SEP, your business will be solely responsible for funding the plan. If you are unable to determine your profit margin from year to year, you may find the SEP attractive since contributions are discretionary. This means that you could decide not to make contributions to the plan in the years that funds are not readily available. You should bear in mind that contributions to SEP IRAs are immediately 100% vested, therefore employees may distribute their account balances at any time, whether or not they still work for your business.

SIMPLE IRAs
SIMPLE IRAs are generally funded with both employer contributions and employee contributions. Employee contributions, generally referred to as salary-deferral contributions, are made on a pre-tax basis from the employee's salary, which reduces his or her taxable income. Similar to SEP-IRA contributions, contributions to the SIMPLE IRA, including those you make, are immediately 100% vested. Employer contributions,to SIMPLE IRAs are usually mandatory for the years the SIMPLE is maintained. However, in instances where you choose to make matching contributions, you need only make contributions to employees who make salary deferral contributions.

Qualified Plans
There are two types of qualified plans: defined-contribution plans and defined-benefit plans. Defined-benefit plans are beyond the scope of this tutorial. The most popular defined-contribution plans are highlighted below.

Profit-Sharing Plan
Generally, contributions to profit-sharing plans are discretionary. Even though the responsibility of funding a profit-sharing plan rests solely with you as the employer, you may find the vesting schedule feature attractive. It allows you to require your employees to work a number of years before they can become entitled to the contributions you make to their profit-sharing account. For example, you may require an employee to work, say, three years to become fully vested, or you may include a provision where the employee would become vested by 20% after two years, with the vesting percentage increasing with each additional year of service and being fully vested after six years.

Another feature of a profit-sharing plan is that it can include a loan feature. One good thing about borrowing from a qualified plan is that the borrower pays back him/herself, including the interest, unlike borrowing from a bank, where the interest is paid to the bank. There are strict rules about vesting schedules and loans offered under a qualified plan. Be sure to consult with your plan consultant, administrator or other professional to ensure you stay within the limits of the law. (For some general guidelines, see Qualified Plan Loans: Guidelines To Operations, Borrowing From Your Plan, Should You Take A Loan From Your Plan? and Eight Reasons To Never Borrow From Your 401(k).)

401(k) Plan
A 401(k) plan is usually funded with salary-deferral contributions; however, as an employer, you may make matching contributions for each employee who makes a salary-deferral contribution, and you may also add a profit-sharing feature, which allows you to make discretionary contributions. The 401(k) plan may also offer loans, and you can institute a vesting schedule for the portion of the contributions you make.

Qualified plans, such as profit-sharing and 401(k) are more complex than IRA-based plans and may require the assistance of a professional plan administrator. The 401(k) plan is usually the most complex and therefore the most costly to maintain. For qualified plans, certain steps must be taken to ensure that contributions, features, and benefits are allocated equitably among higher-paid employees (including business owners) and lower-paid employees.

Summary
The features and benefits discussed above are just a few of the things you need to consider when trying to decide which retirement plan is best for your business. To be sure you select the right plan, consult with your financial advisor and plan professional. To be sure you operate a qualified plan in compliance with regulations and the governing plan document, you may want to hire a qualified plan consultant or plan administrator to perform the necessary checks and balances.

The chart below will help to provide additional insight into how the more popular plans compare to each other.

Comparison of Retirements for Small Employers

--	SEP IRA	SIMPLE IRA	Profit Sharing Plan	401(k) Plan
Responsibility for Making Contributions	Contributions are made by the employer.	Contributions are made by employer and employees.	Contributions are made by the employer.	Employees generally make contributions; however, the employer may also make contributions.
Contribution Flexibility	Contributions are discretionary.	Employer contributions are mandatory.	Contributions are usually discretionary.	Employer matching contributions, if elected under the plan, are mandatory when employees make salary deferral contributions. Profit-sharing contributions are usually discretionary.
Eligible Employers	Any business may establish.	Any business with 100 (or less) eligible employees.	Any business may establish.	Any business may establish.
Participant Eligibility	May exclude employees who are under age 21, have worked less than three out of the five preceding years, and/or those with compensation less than $550 for the year.	Must be made available to employees who earned at least $5,000 in any two preceding years and are reasonably expected to earn $5,000 in the current year.	May exclude employees who have not accrued two years of service. However, if the service eligibility is more than one year, 100% vesting will occur after two years.	May exclude employees who have not accrued one year of service. However, if service eligibility is more than one year, 100% vesting will occur after two years for employer contributions.
Vesting	Contributions are immediately 100% vested.	Contributions are immediately 100% vested.	Contributions may be subjected to a vesting schedule.	Salary-deferral contributions are immediately 100% vested. Employer contributions may be subjected to a vesting schedule.
Loans	Loans cannot be permitted.	Loans cannot be permitted.	Loans may be permitted.	Loans may be permitted.
Age Restrictions	May exclude employees under age 21.	No age restrictions.	May exclude employees under age 21.	May exclude employees under age 21.
Contribution Limit	Employers may contribute on behalf of each eligible employee up to 25% of their compensation or $49,000, whichever is less.	Employees may defer up to 100% of their compensation up to the following: $9,000 for 2004 $10,000 for 2005 $10,000 for 2006 $10,500 for 2007 $10,500 for 2008 $11,500 for 2009 Employees age 50 and older are able to make catch-up contributions of the following: $1,500 for 2004 $2,000 for 2005 $2,500 for 2006 $2,500 for 2007 $2,500 for 2008 $2,500 for 2009 The employer may contribute 2% of compensation to each eligible employee, or make a matching contribution for each employee who makes a deferral contribution. The matching limit is dollar-for-dollar up to 3% of the employee's compensation.	Employers may contribute, on behalf of each eligible employee, up to 25% of their compensation or $49,000, whichever is less.	Employees may defer 100%of compensation up to the following:  $13,000 for 2004 $14,000 for 2005 $15,000 for 2006 $15,500 for 2007 $15,500 for 2008 $16,500 for 2009 Employees age 50 and older are able to make catch-up contributions of the following:  $3,000 for 2004 $4,000 for 2005 $5,000 for 2006 $5,000 for 2007 $5,000 for 2008 $5,500 for 2009 Employers may contribute, on behalf of each eligible employee, up to 25% of their compensation or $49,000, whichever is less. Aggregate contribution for each employee cannot exceed $49,000 + catch-up contributions.
Deadline by which Plan Must Be Established	Employer's tax-filing deadline, including extensions.	October 1 of the year for which the plan is being established.	The last day of the employer's plan year.	The last day of the employer's plan year.
Distribution Rules	Distributions may be made at any time, but may be subject to federal tax and early-distribution penalty if the employee is under age 59.5 when distribution occurs.	Distributions may be made at any time, but may be subjected to federal tax and early-distribution penalty if the employee is under age 59.5 when distribution occurs.	Distributions may only be made when certain requirements, as stated under the plan, are met. Distributions may be subjected to federal tax and early-distribution penalty if the employee is under age 59.5 when distribution occurs.	Distributions may be made only when certain requirements, as stated under the plan, are met. Distributions may be subjected to federal tax and early-distribution penalty if the employee is under age 59.5 when distribution occurs.
Complexity	Low. Minimum administration required.	Low. Minimum administration required.	Medium. May be required to file annual IRS returns. May need the assistance of a third-party administrator to ensure plan is in compliance.	Medium to complex. May be required to file annual IRS returns. May need the assistance of a third-party administrator to ensure plan is in compliance.

by Denise Appleby (Contact Author | Biography)

Denise Appleby is a retirement plans consultant, freelance writer and editor. Before starting her own business, Appleby Retirement Consulting, Denise worked for Pershing LLC for almost 10 years. While at Pershing, Denise rose to the rank of vice president, and held many positions including retirement plans product manager, manager of the retirement plans technical assistance group and retirement plans training manager. Appleby Retirement Consulting provides technical assistance to financial institutions and financial professionals; content for newsletters, websites and magazines; and technical editing services for books and other retirement plans material. Denise holds several retirement professional designations.