SIMPLEs and UNI-DBs for Small Businesses

When the tax laws were written for small businesses, they were often much more generous. For instance, an employer with only him/herself as an employee can save enormous amounts of money for their retirement - far more than the employee or business owner at a much larger company.

Today we discuss the SIMPLE IRA and the Solo or Uni Defined Benefit Plan for small business in the last of our three part series.

The SIMPLE IRA, named because those letter stand for savings incentive match plans for employees, are a much cheaper and far less complicated way for small employers to establish and administer than a traditional 401(k).

This type of plan is indeed easier to manage and implement but there are a few rules you need to keep in mind before choosing a SIMPLE IRA plan for you and your employees. You are required to make a contribution for every worker who receives $5,000 or more in compensation. It doesn't have to be a lot but it has to be something up to but not exceeding $11,800 for the calendar year 2009.

The contributions may resemble an employer match, just like those used when larger companies match employee contributions to their defined contribution plans (401(k)) But the employee must first elect to contribute to the plan themselves and your match to their contribution can not exceed 3% of their salary.

Employers may also choose to make the contribution on the employees behalf, contributing up to 2% of each worker's wages, whether the worker contributes to the plan or not. This "non-elective" mandatory company match of 2% is required to be made on behalf of every employee.

Aside from the fact that the plan cost less to administer, the strings that tether the SIMPLE IRA might not be right for you or your company.

SIMPLEs have a built-in special tax penalty of 15% that is added to the 10% early withdrawal penalty for SIMPLE IRA withdrawals made within the first two years of opening a SIMPLE plan. Although your retirement plan should not be considered a source of income, this penalty can make it more difficult to access that money in times of dire emergency. (But please, consider every other option first before withdrawing built up investments in these plans.)

Because of that string, a SIMPLE IRA can be much less flexible than a 401(k) plan for the average small business. Keep in mind the following while considering this type of plan. Will you be the only employee? If so, a Solo 401(k) might be best. If you are planning to grow your business slowly, adding employees on as needed, you should consider that contribution requirement. An employer must make contributions for all eligible employees and while they are doing so, no contributions can be made to other qualified retirement plans.

The contributions you make to the employees plan belong to the employee immediately after they are posted. This immediate vesting can be troublesome for some seasonal type of employers who do not expect to retain employees or demand their loyalty for a long period of time.

Should you as an employer decide to end the plan, you must wait until the calendar year is completed and while you are waiting, you are obligated to continue with payments to the employee's plan. And here is something else you should consider: no loans are allowed.

If you however fit this profile: older than 50 and earning more than $120,000 per year, have no more that four employees, been in business for at least three or more years and are willing to make mandatory contributions to the plan for three consecutive years of $45,000 or more, there is possibly no better plan on the planet better than this one.

But these plans can be quite a bit more complicated and require you have help with the legalities. But you will find it well worth it especially if you are earing or expect to earn those sums now and in the near future.

KEOGH plans were put to the wayside with the creation of SIMPLEs. If you still have a KEOGH plan in place, the paper work to rollover the plan is relatively straightforward but still must be done by a plan professional. But I believe that if you do rollover a KEOGH, you, your employees and your retirement future will much better off for the effort.

FEATURE	Solo or Self Employed 401K	Solo-DB	SEP-IRA
Eligibility	One person only. (Multiple owners and spouses allowed, but no other employees)	Business owner and up to 4 employees	No limit on number of employees. (most organizations prefer the 401K )
Key Features	Low Cost ($0 to $25/yr) Contributions to plan are discretionary. IRS form 5500-EZ filing required for balances over $250,000 Roth 401k feature	Annual Fees (about $1600/yr +) Offers the largest tax- deductible retirement contribution permitted by law Mandatory contributions for at least 5 years	Very Low cost (about $15/yr) Contributions to plan are discretionary. contributions are made for one employee they must be made by the employer for all eligible employees
Loans	Loans are allowed	Loans are allowed	No Loans
Contribution Limits *	See Self Employed Owner Only Calculator or Contribution limits for max contribution limits.
Deadline to open plan	December 31 or End of company’s fiscal year	December 31 or End of company’s fiscal year	Up to time of tax filing
Deadline to contribute to plan	Employer contributions must be made by the employer's tax filing deadline plus extensions	Employer contributions must be made by the employer's tax filing deadline plus extensions	Before the employer's tax filing deadline plus extensions