CHOOSING A PENSION PLAN

If you were to ask your employees to choose between a pay raise and a retirement plan, the answer might surprise you. In one study, a retirement plan was preferred by nearly 70 percent of employees surveyed by the Life Insurance Marketing & Research Association. Today's baby boomers can look forward to approximately 20 years of retirement, with Social Security providing only a small part of the financial resources they'll need. It's not surprising then that a pension plan is such a coveted benefit and such an important tool in attracting and retaining valuable workers. While most small business owners want to provide a pension plan, many are fearful of being locked into a costly commitment. But today a wide array of options exists from a simple IRA to a full-blown 401(k). The plan you select depends on your company's size, contribution arrangements and administrative costs. Following are brief descriptions of "qualified" pension plans in which employer contributions are tax-deductible and investment earnings accumulate tax-deferred.

401k Facts----
For employees, the opportunity to reduce federal -- and often state and local -- taxes through participation in a 401(k) plan offers significant benefits. While savings are intended for retirement, certain types of loans can provide employees with access to their funds -- employees repay borrowed principal plus interest to their own account. From an employer's standpoint, the 401(k) can be the least expensive and most flexible of all retirement plans. Target Labs in California is now providing a 401k to its employees, who are enjoying the benefits of a tax-advantaged retirement savings program.

Defined Benefit or Defined Contribution?

The first consideration in selecting a pension plan is to determine whether you want a defined benefit plan or a defined contribution plan. The first defines the benefit the employee will receive at retirement, while the second defines the contributions to be made during the employee's working years. A defined benefit plan promises a specific monthly pension at retirement -- typically a flat dollar amount, a percentage of salary, or a percentage of salary multiplied by years of service. The annual contribution is actuarially determined to make sure the employee receives that defined benefit owed. With defined benefit plans, employees know exactly what they will get at retirement. And except for government and most church plans, their benefits will usually be insured by the Pension Benefit Guaranty Corporation (PBGC) -- much the same way bank deposits are insured by the FDIC. (Employers pay annual insurance premiums for this coverage.) If a company has many older workers, however, it may be paying in a substantial amount to fund the benefit in just a few years. Also, if investment assumptions prove incorrect, the company may have to make large contributions to "catch up." (Penalties apply to underfunding). A defined contribution plan specifies the amount of contribution to be made periodically by the employer, the employee or both. The payouts at retirement are determined by the performance of the investments over time, and the investment risk lies with each participant. No predetermined pension is promised, and there is no PBGC protection. Defined contribution plans have gained in popularity in recent years because of their relative simplicity and flexibility. Contributions are determined by formula -- not actuarial assumptions -- and each plan has specific limits on contributions. The plans offer a number of tax advantages, and the employer or employees can select investment options.

Qualified Plan

A qualified retirement plan is a written plan you can set up for the exclusive benefit of your employees and their beneficiaries. It is sometimes called a Keogh or H.R.10 plan.

You, or you and your employees, can make contributions to the plan. If your plan meets the qualification requirements, you can generally deduct your contributions to the plan.

Your employees generally are not taxed on your contributions or increases in the plan's assets until they are distributed. However, certain loans made from qualified plans are treated as taxable distributions.

Qualification requirements. To be a qualified plan, the plan must meet many requirements. They include requirements that determine the following.

Who must be covered by the plan.
How contributions to the plan are to be invested.
How contributions to the plan and benefits under the plan are to be determined.
How much of an employee's interest in the plan must be guaranteed (vested).

More than one job. If you are self-employed and also work for someone else, you can participate in retirement plans for both jobs. Generally, your participation in a retirement plan for one job does not affect your participation in a plan for the other job. However, if you have an IRA, you may not be allowed to deduct part or all of your IRA contributions.

Kinds of Qualified Plans

There are two basic kinds of qualified retirement plans: defined contribution plans and defined benefit plans.

Defined Contribution Plan

This plan provides for a separate account for each person covered by the plan. Benefits are based only on amounts contributed to or allocated to each account.

There are two types of defined contribution plans: profit-sharing and money purchase pension.

Profit-sharing plan. This plan lets your employees or their beneficiaries share in the profits of your business. The plan must have a definite formula for allocating the contribution among the participating employees and for distributing the accumulated funds in the plan.

Money purchase pension plan. Under this plan, contributions fixed and are not based on your business profits. For example, if the plan requires contributions be 10% of each participating employee's compensation regardless of whether you have a profit, the plan is a money purchase pension plan.

Defined Benefit Plan

This is any plan that is not a defined contribution plan. In general, contributions to a qualified defined benefit plan are based on what is needed to provide definitely determinable benefits to plan participants. Your contributions to the plan are based on actuarial assumptions. Generally, you will need continuing professional help to administer a defined benefit plan.

Setting Up a Plan

You must adopt a written plan. The plan can be an IRS-approved master or prototype plan offered by a sponsoring organization. Or it can be an individually designed plan.

Master or prototype plans. The following sponsoring organizations generally can provide IRS-approved master or prototype plans.

Trade or professional organizations.
Banks (including savings and loan associations and federally insured credit unions).
Insurance companies.
Mutual funds.

Adoption of a master or prototype plan does not mean your plan is automatically qualified. It must still meet all the qualification requirements stated in the law.

The information contained in this table is based on current interpretation of the law. Where IRS guidance is pending, assumptions have been made. Seek tax advice for additional rules and complete information.

1 Maximum compensation on which 1997 contributions can be based is $160,000. For plan years beginning
on or after January 1, 1998, maximum compensation on which contributions can be based is $160,000.
2 Maximum compensation on which 1998 employer 2% non-elective contributions can be based is $160,000. RRP

	SEP-IRA	Payroll Deduction IRA	SIMPLE-IRA	401(k)	Profit Sharing	Defined Benefit	Money Purchase Plan
Key Advantage	Easy to set up and maintain.	Easy to set up and maintain.	Salary reduction plan with little administrative paperwork.	Permits employee to contribute more than in other options.	Permits employer to create large account balances for employees.	Provides a fixed, pre-established benefit for employees.	Permits employer to make a larger contribution than through other Defined Contribution Plans.
Employers Who Can Provide This Option	Any business that does not currently maintain any other retirement plan.	Any business with one or more employees.	Any business with 100 or fewer employees that does not currently maintain any other retirement plan.	Any business with one or more employees.	Any business with one or more employees.	Any business with one or more employees.	Any business with one or more employees.
Employer's Responsibilities	Set up plan by completing IRS Form 5305-SEP. No employer tax filing required.	Set up arrangements for employees to make payroll deduction contributions. Transmit contributions for employees to funding vehicle. No employer tax filing required.	Set up by completing IRS Form 5304-SIMPLE or 5305-SIMPLE. No employer tax filing required. Bank or financial institution does most of the paperwork.	There is no model form to establish a plan. Advice from a financial institution or employee benefit advisor would be necessary. Annual filing of IRS Form 5500 required. Also requires special testing to ensure plan does not discriminate in favor of highly compensated employees.	There is no model form to establish a plan. Advice from a financial institution or employee benefit advisor would be necessary. Annual filing of IRS Form 5500 is required.	There is no model form to establish a plan. Advice from a financial institution or employee benefit advisor would be necessary. Annual filing of IRS Form 5500. Actuary must determine funding obligations.	There is no model form to establish a plan. Advice from a financial institution or employee benefit advisor would be necessary. Annual filing of IRS Form 5500 is required.
Funding Responsibility	Employer contributions only.	Employee contributions remitted through payroll deduction.	Employee salary reduction contributions and/or employer contributions.	Employee salary reduction contributions and/or employer contributions.	Employer contribution level can be determined year to year.	Primarily employer; may require or permit employee contributions.	Employer contributions only.
	SEP-IRA	Payroll Deduction IRA	SIMPLE-IRA	401(k)	Profit Sharing	Defined Benefit	Money Purchase Plan
Maximum Annual Contribution Per Participant	Up to 15% of compensation or maximum of $24,000 (indexed). 1	$2,000	Employee: $6,000 per year (indexed). Employer: Either match employee contributions $ for $ up to 3% of compensation (can be reduced to as low as 1% in any 2 out of 5 yrs.) or contribute 2% of each eligible employee's compensation, up to $3,200 2	Employee: $10,000 (indexed). Employer/Employee combined: Up to a maximum of 15% of compensation or a maximum of $30,000. 1	Up to a maximum of 15% of salary or a maximum of $30,000. 1	Per plan terms, employer may permit or require employee contribution.	Up to a maximum of 25% of salary or a maximum of $30,000. 1
Minimum Employee Coverage Requirements	Must be offered to all employees who are at least 21 years of age, employed by the business for 3 of last 5 years and earned at least $400 in a year.	Should be made available to all employees.	Must be offered to all employees who have earned at least $5,000 in previous 2 years.	Must be offered to all employees at least 21 years of age who worked at least 1,000 hours in previous year.	Must be offered to all employees at least 21 years of age who worked at least 1,000 hours in previous year.	Must be offered to all employees at least 21 years of age who worked at least 1,000 hours in previous year.	Must be offered to all employees at least 21 years of age who worked at least 1,000 hours in previous year.
Withdrawals, Loans & Payments	Withdrawals at anytime; subject to current federal income taxes and a possible 10% penalty if the participant is under age 59 1/2.	Withdrawals at anytime; subject to current federal income taxes and a possible 10% penalty if the participant is under age 59 1/2.	Withdrawals at any time. If employee is under age 59 1/2, may be subject to a 25% penalty if taken within the first 2 years of participation and a possible 10% penalty if taken afterwards.	Cannot take withdrawals until a specified event, such as reaching 59 1/2, death, separation from service or other event as identified in plan. May permit loans and hardship withdrawals. Withdrawals may be subject to a possible 10% penalty if participant is under age 59 1/2.	May permit loans and hardship withdrawals. Hardship withdrawals may be subject to a possible 10% penalty if participant is under age 59 1/2. Payment of benefits generally at retirement.	Payment of benefits generally at retirement, may offer participant loans.	Payment of benefits generally at retirement, may offer participant loans.
Vesting	Immediate 100%	Immediate 100%	Employee and employer contributions vested 100% immediately.	Employee contributions vested immediately. Employer contributions may vest over time according to plan terms.	May vest over time according to plan terms.	May vest over time according to plan terms.	May vest over time according to plan terms.
Contributor's Options	Employer can decide whether or not to make contribution year to year.	Employee can decide how much to contribute at any time.	Employee can decide how much to contribute. Employer must make matching contributions or contribute 2% of each employee's salary up to the set maximum.	Employee makes contribution as set by plan option. The employer may match.	Employer makes contribution as set by plan terms.	Employer makes contributions as set by plan terms.	Employer makes contribution as set by plan terms.
	SEP-IRA	Payroll Deduction IRA	SIMPLE-IRA	401(k)	Profit Sharing	Defined Benefit	Money Purchase Plan