Investing in workers
Small-business owners who want to provide employee-pension plans have two popular kinds that are easy to set up. But their deadlines loom.
NEW YORK - Small-business owners who are thinking about setting up retirement plans for their employees should be aware that there are two important deadlines coming up in October that affect the plans known as SIMPLEs and SEPs.
Under the Internal Revenue Code, Oct. 1 is the date by which a business must set up a SIMPLE, or Savings Incentive Match Plan for Employees. And, for owners who received extensions of the filing deadline for their 2007 returns, Oct. 15 is the date by which they must set up a SEP, or Simplified Employee Pension, in order to take a deduction for 2007. It is also the date by which 2007 contributions to existing SIMPLEs and SEPs must be made, again, for owners who received extensions.
SIMPLEs and SEPs are among the most popular retirement plans for small businesses because they are easy to create and maintain. Unfortunately, in the current difficult economic climate, many small owners might decide to forgo a retirement plan. Tax professionals urge owners to try to cut something else in the budget first.
Gordon Spoor, a certified public accountant in St. Petersburg, Fla., said he had drafted returns for small-business owners that included, for example, a $20,000 retirement-plan contribution, and gotten the response, "Things are tightened up in this economy; I don't want to do that."
Spoor then tries to get these owners to contribute $10,000. His concern is that if an owner puts off creating a plan, or does not make an annual contribution, the retirement plan will just keep going by the wayside, year after year.
"You look back 10 years, and you haven't been doing it for 10 years," he said, warning owners that they shouldn't fall into the trap of thinking, "I'll be able to make it up next year."
Spoor also does not believe that, because Wall Street is so volatile now, it is a bad time to be setting up a stock retirement plan. Over the years, even money invested in a down market has grown, and in fact, many professionals say they believe that a dip is a good time to buy stocks.
"Don't let what's happening to the market be your excuse," Spoor said.
Retirement plans do not have to be based on stocks or other investments. An owner can set up a bank account and put cash in for employees; the returns might be smaller over time, but at least there is a plan in place. Moreover, a company can change to a different type of plan later on.
A retirement plan should be considered in the context of the entire business, not just how much money you can deduct on a tax return. Owners would do well to talk to a professional such as an accountant or tax attorney, and perhaps also a human resources consultant to be sure that they are choosing the right plan for their company - a retirement plan is an important recruiting and retention tool that can affect how well a business competes for top workers.
The SEP plan is extremely easy for a small business to create and maintain because it has the least amount of paperwork and reporting requirements of all the retirement plans; an owner can simply go to a bank or other financial institution and set up the account. A SEP allows a company to deduct up to $45,000 for the 2007 tax year and $46,000 for 2008 for contributions to an employee's account.
The SIMPLE provides for employers to match employee contributions in much the same way as a 401(k), and a SIMPLE can actually take the form of a 401(k) if an owner decides to do something more complex. The IRS places more restrictions on a SIMPLE than on a SEP; for example, a SIMPLE can be created only by a company with 100 or fewer employees.
Although the deadline for setting up a SIMPLE is near, owners have until Dec. 31 to set up the even more complex plans known as qualified plans, which include profit-sharing and defined-benefit plans. But they are more costly to maintain, and many small-business owners prefer to stay with the simpler plans.
More on the Web
Owners seeking more information about retirement plans can find an IRS primer, Publication 560, "Retirement Plans for Small Business," at
(select "More Forms and Publications," then "Publication number").
The IRS also has a free CD-ROM, "Individual Retirement Arrangement Resource Guide for Small Business Owners and Individuals." Instructions for ordering it
can be found at
The Labor Department also has information online for small- business owners at
pwbaplan.htm. The site explains the types of plans and the responsibilities, such as paperwork, for each.
Find the Inquirer Retirement Guide at