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401(k) Alternatives For Business Owners

If you have fewer than 25 employees in your small business, a 401(k) plan may not be right for you. But if your business offers no retirement plan at all, you could lose out in attracting the most qualified job candidates. One or more of these alternatives might be a better fit for your situation.


Simplified Employee Pension (SEP IRA). A SEP IRA is low cost and low maintenance.

  • The employer makes all of the contributions; employees can’t add to their accounts.

  • The plan must cover all eligible employees.

  • There is no “plan document.”

  • You don’t have to file annual reports with the IRS.

  • Contributions are tax deductible.

  • Contributions can vary from year to year. So if you hit a lean spell, you aren’t locked in.

Savings Incentive Match Plan for Employees (SIMPLE IRA).For a business with fewer than 10 employees, the SIMPLE IRA is a great starter plan.

  • Your contribution is required; employees have the option of contributing.

  • But you can’t sock away as much for yourself as you can with a SEP IRA, which for 2010 allows a maximum contribution of $49,000. SIMPLE IRA contributions are normally capped at $11,500 ($14,000 for those 50 or older at year’s end) plus an employer matching contribution that can’t exceed 3% of salary.

  • Don’t confuse the SIMPLE IRA with the SIMPLE 401(k), which is like a traditional 401(k) plan but with higher fees and less flexibility.

Profit-Sharing Plan.
This gives each employee a slice of the company’s earnings.
  • An overall annual contributions, based on the company’s performance, is apportioned to individual accounts according to each employee’s salary.

  • Contributions are discretionary and tend to vary from year to year.

  • A business of any size may use a profit sharing plan and can combine it with other retirement plans.

  • Businesses with profit-sharing plans must file IRS Form 5500 each year.

  • Administrative costs may be higher than under more basic plans, because this plan must perform a non-discrimination test to ensure it doesn’t favor highly compensated employees.

Defined-Benefit Plan. This is the most costly, complex plan for small businesses, but it has one big potential advantage—it lets you make very large contributions that can quickly build your nest egg. You’re now allowed to fund a maximum annual retirement benefit of $195,000.

  • Your contributions are mandatory.

  • You can’t decrease benefits retroactively.

  • Defined-benefit plans are available to businesses of any size and can be combined with other retirement plans.

  • Requires filing an IRS Form 5500 with a Schedule B each year.

  • The Schedule B must be signed by an enrolled actuary, who will calculate contribution amounts based on your employees’ ages and the target benefit.

This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.

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