Saving for Retirement
A Review of Employers’ Options
By Patricia Lawrence, Human Resources Manager

Retirement plans have become easier on employers over the last few decades, especially with such tax legislation as the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Such tax incentives have eased the burden of full funding of retirement plans from employers’ shoulders and eased retirement plan administration, while giving employees flexibility in planning for their future.

A Look Back in Time

Employers did not have pension plans or retirement savings plans—as we know them today—until the 1940s, when they embraced private pension plans as a way to reward their workers service and loyalty. Labor unions played a significant role in this development. A National Labor Relations Board (NLRB) ruling in the 1948 Inland Steel Company v. United Steelworkers of America case held that employers had a legal obligation to bargain over terms of pension plans.

Since then, pension plans have evolved into a variety of retirement savings vehicles for all types of employers regardless of company size, profit or nonprofit status or type of business.

Self-Employed Retirement Plan

The Keogh (HR-10) plan was established in 1962 specifically for self-employed individuals such as a sole practitioner or the partners in a CPA firm. However, the Keogh plan contained many restrictions, so that it paled in comparison to corporate qualified pension and profit-sharing plans that enjoyed tax benefits. It was not until the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) permitted retirement plans for self-employed individuals to include similar provisions of corporate plans that self-employed individuals could experience the flexibility and tax advantages enjoyed by their corporate counterparts. EGTRRA further liberalized Keoghs by allowing loans for owner-employees.

Simplified Employee Pension Plans

A Simplified Employee Pension (SEP) plan permits an employer to establish a retirement program with less paperwork and under fewer regulations than other plans. An employer establishing a SEP can be an incorporated entity or a self-employed individual. A SEP is like an Individual Retirement Account (IRA), but with higher contribution limits. Beginning in 2002, EGTRRA increased the percentage of compensation allowance for SEPs from 15 percent of compensation to 25 percent of compensation.

Savings Incentive Match Plans for Employees

The Savings Incentive Match Plans for Employees (SIMPLE) was instituted by the Small Business Job Protection Act of 1996. Its purpose was to provide a retirement savings vehicle for employers with fewer than 100 employees that was free from the intricate rules of qualified plans, such as the nondiscrimination requirements. The elective deferral limit for SIMPLE plans is $9,000 for 2004. As a result of EGTRRA, employees age 50 and older can now make additional “catch-up” contributions of $1,500 for 2004.

401(k) Plan

The 401(k) plan is a defined contribution plan that can be used by profit and nonprofit organizations. Defined contribution plans have surpassed defined benefit plans in the last decade. The employee generally decides how much he or she wants to contribute to the plan up to the federal limit of $13,000 for 2004. The employer decides how much it may match employees’ contributions and the percentage of employees’ salary they will contribute for profit sharing. EGTRRA not only increased the contribution limits for DC plans but implemented the catch-up provision for employees age 50 and over as well.

403(b) Plan

The 403(b) plan was designed for individuals who work in educational institutions and certain nonprofit tax-exempt organizations, such as public schools, hospitals, churches and charitable organization. The 403(b) plan can be structured to receive contributions from both the employee and the employer. The elective contributions and the catch-up contributions mirror that of the 401(k) plan.

Thus, saving for retirement has become more accessible, flexible and cost-effective for employees and employers. More important, however, is that employers, large or small, tax-exempt or not, have many more choices of retirement savings vehicles to offer their employees.