Starting and Running a Retirement Plan...
While two-thirds of employees at companies employing 100 to 499 employees are offered retirement benefits (and the number is even greater at larger corporations), only 25% of those working for companies with fewer than 10 employees have access to this benefit. Small-business owners often believe that having a retirement plan just costs too much. This belief may be unfounded.
Contribution costs
Contributions to a qualified retirement plan can be shifted in whole or in part to employees by selecting the right type of plan. If you want employees to contribute toward their retirement savings (through salary reduction contributions), then choose:
401(k) plan. This type of plan allows participants to contribute up to $13,000 of their compensation in 2004 (or $16,000 if they will be at least 50 years old by the end of the year). You aren’t required to contribute anything, but can encourage employee participation by making matching contributions – the amount is up to you. For example,, you may agree to match 50% of employee contributions up to $5,000 (which costs you $2,500 for any employee who contributes at least $5,000). Your contributions are tax deductible.
SIMPLE plan. This type of plan allows participants to contribute up to $9,000 of their compensation in 2004 (or $10,500 if they will be at least 50 years old by the end of the year). You must make certain matching contributions for the plan to be qualified. Your minimum contribution must be a match of 100% of an employee’s contribution up to 3% of compensation (if an employee opts not to make any contributions, you have no obligation to do so). Alternatively, you can contribute 2% of compensation, regardless of whether the employee makes any contributions.
If you use a SIMPLE plan for retirement savings, the 2% formula enables you to know at the start of the year what your total contributions will be; the 3% matching formula leaves the question open because it depends on employee actions (they can cease contributions at any time).
Set-up costs
The cost today of setting up a qualified retirement plan can be as low as $500 (and at most a few thousand dollars). Annual costs usually are fixed with respect to plan assets (e.g., 1.5% of plan assets); they may be higher in the first several years of the plan when assets are below set amounts.
Sam’s Club has joined with ADP and A.G. Edwards & Sons, Inc. to offer a full-service 401(k) plan to small businesses. Sam’s Club members can obtain discounts on recordkeeping fees, employee education materials, a Web site for you and plan participants, quarterly statements and newsletters. To use this 401(k) plan, you must become a Sam’s Club Business Plus [sm] member ($100 per year) – membership entitles you to a number of other business services and benefits. For details, go to www.samsclub.com and click on “Membership” and then on “Member Benefits – Small-Business Retirement Plans.”
Tax credit
The tax law rewards small businesses that do not have a retirement plan for setting one up: These businesses can claim a tax credit for administrative costs related to setting up the plan and educating employees. The credit is $500 per year for the first three years of the plan. Caution: The credit can only be claimed if there is at least one participant who is not an owner (or the owner’s spouse).
You can elect to use the credit for the year before the year in which you set up the plan. If you set up a plan now, you can claim the credit on your 2003 return (if you have already filed the return you’ll have to make a refund claim).
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