Many business owners today recognize that in order to retain quality employees, reduce turnover, and contribute to good morale, their company must provide a qualified retirement plan. Eligible contributions are deductible expenses to your business and all contributions grow tax-deferred until withdrawn.*

Which Plan is Right for your Business?

• Simplified Employee Pension (SEP)
• SIMPLE IRA
• Profit Sharing Plans
• Age-weighted / comparability profit sharing plans
• 401(k) profit sharing
• Safe-harbor 401(k)
• Owner only / one-person 401(k)
• Defined benefit pension plans

There are two general categories of qualified retirement plans. Defined Contribution Plans and Defined Benefit Plans.

• Defined Contribution Plans, is as the name implies, specifies a percentage of compensation to be contributed on behalf of each participant. The monies grow tax-deferred until Withdrawn from the plan.
• Defined Benefit Plans, define the benefits to be received at retirement. such as a fixed monthly payment or a certain percentage of compensation. Contributions are made annually to fund these benefits based on certain actuarial assumptions and the benefit formula stated in the plan document.

Simplified Employee Pension (SEP) Plans

A Simplified Employee Pension plan Is an employer sponsored retirement plan that has minimal IRS reporting and disclosure requirements for compliance. The employer deposits contributions into the IRA of each plan participant thereby simplifying the accounting process.

Contributions

A Simplified Employee Pension plan Is an employer sponsored retirement plan that has minimal IRS reporting and disclosure requirements for compliance. The employer deposits contributions into the IRA of each plan participant thereby simplifying the accounting process.

Advantages

A SEP plan is easy to set up. It Is comparable to an employer establishing and funding a "company provided IRA" for the benefit of each employee.

SIMPLE IRA Plans

An employer maintaining a SIMPLE plan may not maintain any other qualified plan in which the employees currently receive benefits. Employees may defer up to $10,000 (indexed for 2007), with no set maximum percentage of compensation. There are ftcatch up provisions" for employees over age 50 which permit an additional $2000 contribution.

Contributions

The employer must make a mandatory contribution as either a matching dollar-for-dollar contribution on the first 3% elective deferral or a 2% uniform contribution to all eligible employees, regardless of whether they made an elective deferral.

Advantages

A SIMPLE plan is not subject to many of the tests applicable to other retirement plans. As a result, there are minimal plan administration costs, and highly paid or owner-employees are not restricted in their ability to defer as a result of low participation by the lower-paid employees.

Profit Sharing Plans

Profit sharing plans offer both design flexibility and discretion as to making contributions. Company contributions are determined by the employer and can be allocated in a number of ways. If the company makes little or no profit during a year, no contribution is required, although low profits don't restrict the contribution level.

Contributions

An employer's maximum deduction Is limited to 25% of the annual compensation paid to eligible employees. The individual maximum contribution limits for employees is the lesser of 100% of compensation or $44,000.

Advantages

The employer can make a discretionary contribution each year, which can be subject to a vesting schedule and the plan may be integrated with Social Security.

Age Weighted/Comparability Tested Profit Sharing Plans

These plans utilize allocation methods that base contributions on both the age and compensation of eligible employees, similar in concept to a defined benefit pension plan, but with discretionary contributions.

Contributions

In an age-weighted plan, the participant's age, or length of time until retirement, is factored into the allocation formula on an indiVidual basis. The plans favor older participants who receive a larger proportionate share of the contribution. The comparability plan allows the employer to select classes of employees that provide for different contribution allocation levels. The plan requires that various non discriminatory test be passed for the plan to be acceptable.

Advantages

An age-weighted plan may be appropriate if a business wants to favor older, highly paid participants. Comparability plans allow an allocation that benefits a specific class of (older)employees.

401(k) Profit Sharing Plans/ Roth 401(k) Profit Sharing Plans

A 401(k) plan Is a type of profit sharing plan that includes an elective salary deferral provision. The employer typically has the ability to make a matching contribution that Is tied to the elective salary deferral, as well as a profit sharing contribution that is allocated to all eligible participants. Plan participants usually have the ability to select their own IndiVidual asset allocation from various investment alternatives available to the plan.

A Roth 401(k) plan is a new feature of a 401(k) plan that permits participants to make after tax salary deferrals into a 401(k) plan. If the employer elects to offer the Roth 401(k) provision, participants will have a choice of making pre-tax or after-tax salary deferrals.

Contributions

The three common 401(k) contribution types are:

• Elective salary deferral - the employee can defer up to $15,000 for 2007. (This is an indexed amount subject to cost of liVing adjustments and may change each year.)
• Employer matching - the employer can make a discretionary contribution based on a percentage of the employee'S elective salary deferrals.
• Profit sharing - can be allocated in any method available to regular profit sharing plans.

An employer's maximum deduction Is limited to 25% of the annual compensation paid to eligible employees. ³ In addition, the employer must meet several non-discrimination tests, which may further limit the amounts deferred by certain highly paid employees.

Employees age 50 and older may make a $5,000 catch-up contribution, which does not count against their individual maximum annual additions limit of the lesser of $44,000 or 100% of compensation.

Advantages

A 401(k) plan allows both employer and employees to contribute toward retirement while reducing the current tax burden of both. Because employees are actively involved as participants, 401(k) plans typically have a high visibility level In terms of the employee's perception of the benefit being provided by the employer.

³Only employer matching and profit sharing contributions.

401(k) Safe-harbor Plans

A safe-harbor 401(k) plan is not subject to non-discrimination tests, therefore all employees have the opportunity to maximize deferrals.

Contributions

Contribution types and limits are the same as those for a 401(k) profit sharing plan, with a "safe-harbor" exception. To qualify for the exception, the employer must make a 100% vested contribution of either:

• 3% of compensation for each eligible employee or
• A matching contribution of up to 4% of compensation.

The safe harbor then permits the owner and other highly compensated employees to defer the maximum without regard to the deferral levels of the non-highly compensated employees.

Advantages

In addition to the advantages offered by a 401(k) profit sharing plan, the safe-harbor 401(k) avoids the non-discrimination testing that may limit the amounts the highly compensated employees may defer.

Owner Only/One-person 401(k)

A recent tax law permits the owner/partner/shareholders of a small business, and their spouses, to maximize contributions if net compensation is less than $176,000 (Indexed for 2007).

Contributions

Contribution types and limits are the same as those for a 401(k) profit sharing plan, including Roth 401(k) salary deferrals.

Advantages

Discrimination testing is not required until an employee other than an owner/partner/shareholder or their spouse enters the plan.

Defined Benefit Pension Plans

A defined benefit pension plan is designed to provide a specific benefit amount at retirement, This is the traditional pension plan in which the employer bears the risk of providing the promised level of retirement benefits to participants.

Contributions

Unlike the defined contribution plans previously discussed, the defined benefit plan limit is based on the benefit to be received at retirement, not on the annual contribution. Each year the plan's actuary determines the required annual contribution based on several factors such as age, salary level and years of service, as well as interest rate assumptions, The maximum annual benefit for which a plan may fund is the lesser of 100% of the participant's compensation up to $175,000 (indexed for 2007).

Advantages

For participants closer to retirement, contributions to a defined benefit plan may exceed the 100% or $44,000 limit imposed by defined contribution plans. This may be advantageous to a business owner who is approaching retirement age, has never started a retirement plan and wishes to put away as much money as quickly as possible. A defined benefit plan can also be advantageous for an employer.

Conclusion

The retirement plans discussed here Illustrate that there are a wide variety of choices available to you as a business owner. Baer Financial Services In conjunction with your legal and tax advisors can provide you with the guidance to choose the plan that best meets both your individual and company needs.