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Business Tip of the Month

Business Tip
of the Month
For the month of August 2006

Keep your retirement plan SIMPLE

Offering a retirement plan can be a powerful tool when you’re competing to attract the best employees. It also helps to motivate and retain your existing staff. You might even qualify for a tax credit for establishing a retirement plan for your business. That’s why, if you don’t already have a plan, you should consider setting up a SIMPLE plan.

As the name implies, SIMPLE plans minimize the costs and administration associated with more complex retirement and pension plans. They’re intended for small businesses – generally you’ll qualify if you have 100 or fewer employees. They come in two varieties — SIMPLE IRAs and SIMPLE 401(k) plans. Here are the basics of each.

SIMPLE IRA
With a SIMPLE IRA, you set up an individual retirement account for each eligible employee. Eligibility requirements are low and, in practice, most of your non-union employees will qualify to participate. You’re not allowed to discriminate among employees.

Contributions into the accounts come from two sources. Employees can contribute part of their salary into the account, up to the annual limit ($10,000 for 2006). Their salary deferral contributions are pretax.

As employer, you can contribute in two ways. You can match employee contributions dollar for dollar, generally up to 3% of their salary. Or you can make a contribution of 2% of salary for eligible employees, whether or not they contribute themselves.

There are no annual filings required, and administrative costs are low. If employees leave, their SIMPLE IRA accounts go with them.

SIMPLE 401(k)
A SIMPLE 401(k) works much like a standard 401(k) plan, except that it avoids the costly nondiscrimination testing. Eligibility and employee and employer contribution limits and choices are the same as a SIMPLE IRA. Costs will be higher than for a SIMPLE IRA, although less than a standard 401(k) plan.

Both types of SIMPLE plans offer you a chance to provide an attractive employee benefit with reduced cost and administration. October 2, 2006, is the deadline for establishing a plan effective for 2006. If you think this type of plan will work in your business, we can provide more details of the tax and other requirements. Call us.

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