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 set up 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 and 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 pretax 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 article. 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 or 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.)

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 in a manner that discriminates in favor of higher paid employees over 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 retirement-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.

Plan Characteristics 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 usually 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) employees who earned $5,000 or more during the previous year. 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.
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 $51,000, whichever is less. Employees may defer up to 100% of their compensation up to the following:
$12,000 for 2013
Employees age 50 and older are able to make catch-up contributions of the following:
$2,500 for 2013
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 up to 25% of compensation paid to eligible employees. An employee\'s total contributions cannot exceed $51,000. Employees may defer 100% of compensation up to the following:
$17,500 for 2013
Employees age 50 and older are able to make catch-up contributions of the following:
$5,500 for 2013
Employers may contribute up to 25% of compensation paid to eligible employees.
Aggregate contribution for each employee cannot exceed $51,000 + 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.

Conclusion
Small business owners should give careful consideration to the type of retirement plan they choose for their businesses. A business that is new may want to choose a retirement plan with a discretionary feature, whereas a business that has established a profit pattern over the years may be comfortable with a plan that has a mandatory contribution feature. As mentioned above there are other factors that should be considered. A competent retirement plan professional can help you to choose the retirement plan that is right for you and your business.

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