Businesses should weigh retirement plan options

NEW YORK — Like many investors, small business owners may be wondering if this is a good time to go into the stock market. For those with employees, the debate may extend to whether it’s the right time to set up company-sponsored retirement plans.

The timing issue for employers is twofold. First, while no one knows where the stock market is headed, it has already made up a sizeable chunk of its devastating losses and any owner who wants employees to benefit from a continuing recovery should consider setting up a plan soon. Second, deadlines are approaching for creating some of the most popular, and least complex, plans.

Accountants and other financial advisers generally recommend that small businesses set up retirement plans as soon as possible, simply because employees’ savings tend to grow over the long term even with serious setbacks like the one the market has seen over the past year.

“If you think the market financials are going to be greater (at retirement) than where they are today, you should be considering this,” said Bob Doyle, president of Doyle Wealth Management Inc. in St. Petersburg, Fla. “Do you want to buy into the Dow at 9,500, or do you want to buy into the Dow at 12,000?”

There are a variety of retirement plans available, including several aimed at small businesses. Companies need to comply with paperwork and other requirements set by the IRS, but depending on which plan you choose, the time and effort can be minimal.

The easiest of the plans is called a SEP, or Simplified Employee Pension. An owner only needs to go to a bank or other financial institution to set up a SEP. Companies are not required to file annual reports with the IRS as they must do with more complicated plans such as many 401(k)s or profit-sharing plans.

The IRS is very flexible with the timing of tax deductions for an employer’s SEP contributions. The plan must be set up and initial and subsequent contributions must be made by the due date of the owner’s return. If owners obtained an extension of the April 15 filing deadline this year, they have until Oct. 15 to set up a SEP and make their contributions for 2008. And they still have plenty of time to make 2009 contributions as well.

Another deadline coming up is for the creation of a SIMPLE, or Savings Incentive Match Plan for Employees. Owners have until Oct. 1 to set up a SIMPLE, although a company that is formed after Oct. 1 can still create one by the end of the year. These plans are somewhat more complex than SEPs but still have far fewer requirements and paperwork than what are called the qualified plans.

Qualified plans, which include some 401(k)s, profit-sharing plans and defined benefit plans, have the most paperwork and requirements, and an owner will likely need the help of a benefits consultant before setting one up. There is a Dec. 31 deadline for creating these plans.

The IRS has a Web page devoted to retirement plans at www.irs.gov/retirement/sponsor/article/0,,id=155347,00.html and detailed information in its Publication 560, Retirement Plans for Small Business. The publication can be accessed and printed at www.irs.gov/pub/irs-pdf/p560.pdf.

Doyle said owners, in deciding which type of plan to set up, need to consider how much money they want to contribute to employees’ accounts. There are varying contribution limits for the different kinds of plans, and employees can contribute to their own accounts in many of the plans, but not in a SEP.

How much an employer wants to contribute of course depends on what the company can afford. Owners should take into consideration that a benefit like a retirement plan is a way to retain good employees and recruit new ones. That may not be an issue right now in a tight labor market, but it will start to matter as the economy recovers.

“Some are generous and some are myopic in their focus,” Doyle said.

Doyle said owners should be careful to choose a plan that won’t consume too much of their time and energy. When his clients come to him for advice about retirement plans, he tells them, “I want to keep your adoption of this simple. The last thing I want to do is add an administrative burden to running your small business.”

Owners should consult with a tax professional before setting up a retirement plan. An accountant or tax attorney can help with the number-crunching that is a critical part of choosing among the different plan options. Benefits consultants can also give advice on the kinds of plans available.