Listed below are descriptions of the retirement plan options available to business owners. Call your financial professional to discuss which option or combination of options would be best for you, your employees and your business.

Defined Benefit Plans

• For all businesses; attractive to firms with key employees who are over age 50 and substantial excess cash flow
• Contributions by employer; allows highest contributions and tax deductions
• Can be expensive to fund if business has many employees; contributions are required regardless of business profits and losses; investment risk assumed by employer
• Maximum Annual Contributions for Plan Year 2006: Determined by actuary; funding contributions cannot exceed an annual retirement benefit of $175,000
• Administration is complex and requires annual actuarial review

Defined Contribution Plans

• For all businesses; different types of plans available to meet needs
• Contributions by employee and/or employer; percentage of each participant’s salary put into the plan each year, subject to applicable limits; investment risk assumed by employee
• Limit imposed on contributions allowable for owner and key people much lower than for defined benefit plans
• Maximum Annual Contributions for Plan Year 2006: Depends on plan type (see below)
• Administrative requirements depend on plan type (see below)

Types of Defined Contribution Plans

• Owners-Only 401(k)
• 401(k)
• Safe Harbor 401(k)
• Profit Sharing
• Money Purchase
• Age Weighted Comparability

  Owners-Only 401(k) Plan

  • For a sole owner plus family members or partners — no common law employees
  • Allows maximum annual deductible contribution for defined contribution plans and is easy to implement
  • Use is limited to single-owner businesses (partners, relatives may be allowed)
  • Maximum annual contributions for Plan Year 2006: $15,000 (plus $5,000 catch-up for those over age 50). Plus optional profit-sharing plan enables you to contribute 25% of salary (20% of self-employment income) up to $44,000 (plus catch-up). The 415(c) limit includes any deferrals under 403(g).
  • Minimal administrative requirements

  401(k) Plan

  • Any size company
  • Flexible vesting schedules and provisions for loans; funded by employee contributions; various plan types to suit specific needs; annual employer contributions not required
  • Administration is more complex and costly than SEP or SIMPLE due to testing and filings
  • Maximum Annual Contributions for Plan Year 2006: 100% of salary up to $15,000 (plus $5,000 catch-up for those age 50 or older). Plus optional profit-sharing plan enables you to contribute 25% of salary (20% of self-employment income) up to $44,000 (plus catch-up). The 415(c) limit includes any deferrals under 402(g).
  • Annual reporting requirements; special top-heavy and non-discrimination tests required
    

  Safe Harbor 401(k) Plan

  • Any size company; businesses that wish to enable key employees to save more for retirement
  • Key employees can make substantial salary deferral and catch-up contributions
  • Employer matching required and immediately vested
  • Maximum Annual Contributions for Plan Year 2006: Same as 401(k)
  • Non-discrimination testing (ADP/ACP) eliminated

  Profit-Sharing Plan

  • Any size business
  • Like SEP IRA, contributions from employers only; may be used in conjunction with 401(k); contribution levels can vary from year to year or skipped
  • Administration can be complex
  • Maximum Annual Contributions for Plan Year 2006: No employee contributions; employer may contribute up to 25% of compensation, up to $44,000
  • Moderate to high administrative requirements

  Money Purchase Plan

  • Any size business
  • Like Profit-Sharing, contributions from employers only; may be combined with 401(k); yearly contribution levels are fixed when plan is established
  • Administration can be complex; lacks flexibility — employer contributions must be made every year, regardless of business performance
  • Maximum Annual Contributions for Plan Year 2006: No employee contributions; employer must contribute at predetermined amount from 25% of compensation, up to $44,000
  • Moderate to high administrative requirements

  Age-Weighted/New Comparability Plans

  • Types of profit sharing plans for businesses that wish to enable key employees to save more for retirement; may be used in conjunction with 401(k) plan
  • Higher contribution percentage may be made for older workers (age-weighted) or by ownership, tenure, etc. (new comparability)
  • Require more complicated IRS documentation and testing
  • Maximum Annual Contributions for Plan Year 2006: Same as Profit Sharing
  • More complex than 401(k)

  Other Tax-Favored Retirement Plans

  SEP-IRA

  • Suitable for sole proprietors or business with few employees who want simplicity
  • Easy to set up and maintain; flexible contribution options; annual contributions not required
  • Employer must make contributions for virtually all employees; immediate vesting
  • Maximum Annual Contributions for Plan Year 2006: 25% of salary or 20% of self-employment income up to $44,000 per person
  • No annual filings

  SIMPLE IRA

  • Best for businesses with few employees – maximum 100
  • Employees and employer may contribute; simpler to administer than 401(k)
  • Annual contribution required; lower contribution limits; immediate vesting
  • Maximum Annual Contributions for Plan Year 2006: Not to exceed $10,000 (plus $2,500 catch-up)
  • No annual filings

  Non-Qualified Deferred Compensation Plans

  • For C corporations with highly compensated key employees
  • Additional savings and potentially higher retirement income for highly compensated employees; not all employees covered; not subject to discrimination testing; may be used in conjunction with qualified plans
  • No tax deduction for contributions; limited investment choices; administration and trust expenses
  • Requires plan document; Rabbi Trust; No 5500 filing
  • No maximum annual contributions, amount determined by employer
  • Risk of forfeiture
  • Can be used in conjunction with qualified retirement plans