Pensions - 401K, SEP

With the exception of health insurance, retirement plans are the benefit employees desire most. The good news is that small business owners have a variety of plan options from which to choose.

401(k) and Profit-Sharing Plans - 401(k) plans allow employees, often matched in whole or in part by their employers, to set aside a portion of their salary for retirement. The employee is not taxed on this income until withdrawals are made, and the employer's cost is a tax-deductible business expense. Employees can select the investment vehicles into which their funds are deposited. Retirement benefits are not guaranteed, however, and while the sum at age 65 may be substantial, it can also be much less if the employee has made poor investment choices or the stock and bond markets have not performed as well as expected. Employees can borrow from their 401(k) plans for education, a new home, a medical emergency etc., although the loan must be repaid within a certain specified period of time. Sometimes employers elect to integrate the 401(k) plan with a discretionary profit sharing plan that can increase the employer's retirement contribution for employees.

Simplified Employee Pensions (SEPs) - Created with the small business owner in mind, SEPs allow employers to set up IRAs for themselves and their employees. The employer contributes a percentage of each employee's salary each year, up to a fixed maximum. SEPs have low administrative costs, and can even be started by those who are self-employed. Since the business owner can decide how much to contribute each year, this type of plan is often the answer for businesses that may want to adjust their contribution based on the health of the business.