With today's low unemployment rates and highly competitive labor markets, each company must do all it can to first attract--and then keep--its workforce. This fact is true for employers large and small, since they all must compete against one another for quality employees. With this in mind, retirement plans have long been a key element to a competitive package.

For many employers, the best approach is a "qualified" pension or profit-sharing plan. Qualified plans provide an enormous array of plan design features, enabling the employer to achieve a wide range of objectives. These plans also include reporting and recordkeeping requirements and some administrative expense.

Many smaller businesses don't need every feature offered by a qualified plan. For those employers, the best plan is one that can deliver an attractive benefit with a minimum amount of administration and expense. More recently, many small businesses with employees who would like to defer income, have looked to the SIMPLE IRA as a cost-effective retirement plan. However, many smaller businesses are discovering the Simplified Employee Pension, or SEP, can be an equally effective solution.

Is a SEP Right for You?

SEPs were created by Congress in 1978 to provide an alternative to traditional retirement plans.

SEP plans provide many of the advantages of a profit-sharing plan for the employee, but with much less reporting and recordkeeping for the employer. For the employer who values simplicity, a SEP can be the ideal plan.

While SEPs are usually most attractive to smaller employers, any business (including C corporations, S corporations, partnerships, and sole proprietorships) can establish a SEP. Unlike a qualified plan, a SEP may even be established after the end of the tax year. The deadline is the tax filing date of the employer, including extensions.

Establishing a SEP is relatively easy. The employer completes an IRS Form 5305-SEP. This simple, one-page document is used to set the age and service requirements for participation in the plan, along with the formula for allocating contributions. Once completed, a copy of this document plus other SEP information, is given to each eligible employee to satisfy the disclosure requirements of the law.

Participation Requirements

Businesses may establish eligibility requirements for their plans. The employer may exclude all employees covered by a collective bargaining agreement (if retirement benefits were the subject of good faith bargaining), those under age 21, and any employees who have not worked for the employer in at least three of the previous five years.

Contributions to a SEP are allocated to eligible employees in proportion to compensation, with each receiving the same percent of pay. These contributions can be substantial, either the lesser of up to 25% of an employee's compensation (capped at $200,000) or $40,000 in 2002. Best of all, contributions are discretionary. Employers can vary the amount from year to year, or skip the contribution entirely. (Note: Contributions for self-employed individuals are subject to additional limitations.)

SEPs offer administrative simplicity because contributions are deposited directly into IRAs opened by the employees who make the investment decisions. Since the employee, not the employer, controls the IRA, the need for detailed recordkeeping and reporting is eliminated, and SEPs are completely portable, something much appreciated by employees.

*Securities offered through Registered Representatives of MML Investor Services, Inc., member SIPC.

Copyright © 2002 Liberty Publishing, Inc. All rights reserved.

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  Funding Company-Sponsored Plans

There has been a dramatic shift in the way most companies are now structuring retirement plans. Previously, under a defined benefit plan (e.g., a typical "pension" plan), the employer generally funded the plan and the employee received a retirement benefit based on a formula that factored highest salary attained and years of service. In this type of plan, the plan guarantees a benefit and the employer assumes the risk for assuring that plan assets would be sufficiently available when employees started drawing their pensions. Because defined benefit pensions represent large future liabilities, many companies have sought ways to restructure their retirement plans. In contrast to a defined benefit plan, a defined contribution plan (e.g., 401(k) plan) is typically funded through employee pre-tax salary deferrals and, sometimes, employer matching contributions. In such a plan, the retirement "benefit" will be a function of total contributions made on behalf of an employee during his or her working years and the results of the funding options chosen by the employee. Although the employer may decide to match employee contributions, there is no obligation to do so.

This should not be considered tax or legal advice, you should consult your own advisors regarding your specific situation.

Copyright © 2002 Liberty Publishing, Inc. All rights reserved.

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