Cents and Sensibility
Cents and Sensibility
Question: I run a small business and would like to start a retirement plan for myself and my employees, possibly a SIMPLE plan. Can you explain how it works? How does small biz
IRA work? It’s SIMPLEAnswer: With A SIMPLE-IRA retirement plan, employers must cover all employees who have earned $5,000 annually in each of the past two years and are expected to earn $5,000 in the current year. The SIMPLE requires no anti-discrimination tests or top-heavy tests.
Employees can contribute up to $6,500 per year before taxes, with no limit on the percent of their compensation. Employers are required to match employee contributions dollar for dollar, up to 3 percent of the employee's salary. For example, the employer match for an employee earning $25,000 per year would be up to $750.
Business owners who want to be more selective in who participates in their retirement plan may find a profit-sharing plan or a money purchase pension plan appropriate. These allow for the exclusion of employees under 21 who have not worked in your business two years (a year of service equals 1,000 hours); therefore, part-time employees may be excluded.
Although profit-sharing and money purchase pension plans are similar, they do have a few key differences, including:
>> Contributions to a profit-sharing plan may not exceed the lesser of 15 percent of compensation or $35,000. An individual is limited to $200,000 (2002 figure) in compensation for contribution purposes. In addition, contributions are flexible and can vary each year.
>> Contributions to a money purchase pension plan may not exceed the lesser of 25 percent of compensation or $35,000. As with a profit-sharing plan, an individual is limited to $200,000 in com- pensation. Regardless of business or economic circumstances, contributions must be made annually.
The advantages common to both profit-sharing and money purchase pension plans are: the ability to limit employees' access to funds through vesting schedules, loan provisions and favorable tax treatment for some distributions. Due to administrative costs and the costs of additional mandatory IRS filings, profit-sharing and money purchase pension plans may be more expensive than SIMPLE-IRAs.
Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com