Memo to small business owners thinking about starting or contributing to retirement plans: Keep an eye on the calendar.
There are several deadlines in September and October that owners must meet if they want to set up plans known as SEPs or SIMPLEs or if they still want to make contributions for 2009 for many existing plans. The deadlines are set by federal tax law.
Contributing to retirement plans became less of a priority or even an impossibility for many companies that struggled with cash flow problems during the recession. But with business slowly turning around, many owners are thinking about restoring or increasing contributions. And some, knowing that they need to be competitive when it’s time to start hiring, want to set up plans for the first time.
Luckily for time-pressed owners, a retirement plan can be set up quickly as long as it’s a SEP or SIMPLE. Both were designed to minimize the paperwork and maintenance burdens on small businesses.
A QUICK LOOK AT THE DATES
These are the upcoming deadlines that owners need to be aware of.
—Sept. 15. Corporations that obtained extensions of the March 15 deadline to file their 2009 returns have until this day to make retirement plan contributions and get a deduction.
—Oct. 1. This is the last day that most businesses can set up SIMPLEs for 2010. If a company is started after Oct. 1, the IRS says it must set up a plan “as soon as administratively feasible.”
—Oct. 15. Owners who are sole proprietors and who obtained extensions of the April 15 deadline to file their 2009 returns have until this day to set up a SEP and take a 2009 deduction. They also have until this day to make 2009 contributions for many types of plans and get a deduction.
While Oct. 1 is the cutoff date for creating a SIMPLE, owners should know that they have until the end of the year to set up more complex plans such as defined contribution plans or defined benefit plans.
A LOOK AT THE PLANS
SEP is short for Simplified Employee Pension. It is the quickest and easiest plan for a small business to create because it has the least amount of paperwork and reporting requirements of any retirement plan. An owner can go to a bank or other financial institution to create a SEP, and while there is an IRS form to be completed, Form 5305, Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement. It does not have to be filed with the government. A SEP allows a company to deduct a maximum of $49,000 for contributions for 2009 and 2010.
With a SEP, the employer makes contributions, but employees do not contribute to these accounts.
The SIMPLE, or Savings Incentive Match Plan for Employees, provides for employers to match employee contributions. Some SIMPLES are in the form of Individual Retirement Accounts, while others are in the form of more complicated 401(k)s. The IRS places more restrictions on a SIMPLE than on a SEP. For example, a SIMPLE can only be created by a company with 100 employees or fewer who were paid at least $5,000 each during 2009.
An employer can match employee contributions on a dollar-for-dollar basis up to 3 percent of a staffer’s compensation.
Creating a SIMPLE means more paperwork than a SEP, but it’s still a fairly easy process and there’s no filing with the IRS. There are two forms for setting up a SIMPLE. Form 5305-SIMPLE is used if the business chooses a financial institution where the employee accounts are located. Form 5304-SIMPLE is used if employees are allowed to choose the institutions.
The more complex plans including defined contribution and defined benefit plans require much more time and paperwork to create and maintain. Owners can find out more about the various retirement plans and how the tax laws treat them in IRS Publication 560, Retirement Plans for Small Business. It can be downloaded from the IRS website, www.irs.gov.
Before setting up a plan, it makes sense to talk to an accountant or other tax professional. The more complex plans may require the help of a benefits or human resources consultant as well, which will make the plans more expensive to set up and administer.
Source: The Associated Press.