Finally, there are the employee stock ownership plans (ESOP). These are also qualified retirement plans based on a defined contribution. Like a stock bonus plan, the investments are primarily in employer stock.
The next set of retirement plans are not qualified plans. They are often mistaken for qualified plans and are lumped under the general heading of retirement plans. The vehicle is an IRA. The vesting is immediate, loans are not allowed, and life insurance is not an investment option.
The most basic of these is the payroll deducted IRA. The employer establishes the plan for the benefit of the employees. The number of employees covered and which employees are covered is purely discretionary. The yearly contribution limits are the same as for a traditional IRA: $5,000 maximum contribution and an additional $1,000 if the employee is age 50 or older.
Simplified employee pension
Next is the simplified employee pension (SEP). It looks very much like a profit sharing plan because it involves only employer contributions. This plan is not for employers with seasonal and part-time employees.
A SEP must cover all employees who are at least 21 years of age and have been employed three of the last five years with compensation of at least $550. Seasonal and part-time employees would place too great a burden on cash flow and profits.
The simple IRA was created to provide an inexpensive alternative to most retirement plans. And as such, any of the other plans are typically a better choice for the business owner.
There are mandatory employer contributions. There is a formula which must be adhered to in determining the employer’s contribution amount.
The vesting, because it is an IRA, is immediate. If the employee leaves at any time, the employer’s contributions to the employee’s account leave with the employee.
Another issue with simple IRA is the coordination with other plans. If a business has a simple plan, they may not integrate it with another retirement plan.
Now what about Gladys and George? We added a 401-k to their existing profit sharing plan and recovered the cost of the plan amendments through the reduction in their income taxes.
Retirement Plans to consider
- Defined benefit plans
- Defined contribution plans
- 401-k plans
- Stock bonus plans
- Employee stock ownership plans
- Individual retirement accounts
- Simplified employee pensions