Table: A Retirement Plan Primer For Small Business
PENSION PLAN DESCRIPTION SIMPLIFIED EMPLOYEE Popular among the smallest companies. Employer PENSIONS (SEP) contributes to IRA of employees with effective annual contribution limit of $22,500 per em- ployee. Plan vests (becomes wholly owned by employee) immediately. Employee can continue to make regular $2,000 IRA contribution. PROS: Simple and inexpensive. CONS: Difficult to ex- clude part-time employees. SALARY REDUCTION An SEP with a salary-reduction feature. Employee (SARSEP) deferrals of up to $9,240 may not be counted as compensation by IRS. Only available to companies with no more than 25 eligible employees, and at least 50% must elect to participate. PROS: Same as for a SEP. CONS: Salary deferrals to highly compensated employees limited by the amounts deferred by low-paid workers. PROFIT-SHARING A discretionary contribution formula. Effective annual contribution capped at $22,500. Contrib- utions limited to no more than 15% of employees' compensation. Variable vesting. PROS: Very flexible plan. Loans and hardship withdrawals may be permitted. CONS: Annual reporting requirements. Employer can have fiduciary responsibility. Greater cost to set up and administer. 401(k) A profit-sharing plan with a salary-reduction feature. An employee may defer up to $9,240 per person for 1995. Employer may match employee deferrals. Aggregate employer contributions lim- ited to 15% of employee compensation. PROS: Same as profit-sharing. CONS: Same as profit-sharing. Record keeping. MONEY PURCHASE A fixed-contribution formula. Employer contrib- utions limited to 25% of employee compensation. Flexible vesting. PROS: Attractive for employers wanting to contribute more than 15% of employee compensation. May be paired with profit-sharing plan for maximum flexibility and contribution. CONS: Same as profit-sharing. Also, distribution rules have several specific requirements. DATA: MATTHEW R. LUOMA OF JANUS CAPITAL CORP., BUSINESS WEEK
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