Now is the time to institute a deferred compensation plan to take advantage of the tax savings they offer. Generally, deferred compensation plans allow you to put retirement funds aside that grow tax deferred while taking a current deduction for the contribution to the plan. The following is a short synopsis of some of the available plans:
 

Non-Qualified Plans: Non-qualified plans are subject to less censure by the I.R.S.; the plan adoption agreement does not require approval by the I.R.S. Costs of maintaining the plan are generally less than the costs for a qualified plan.
 

SIMPLE IRA: The plan consists of separate IRA accounts for each employee, which must be set up no later than October 31 of each year in order for the employer contributions to be deductible. The eligible employee is allowed to contribute up to $6,000 to the IRA through salary reduction payments. The employer must then match these contributions either:

A. Dollar-for-dollar up to 3% of the employee's calendar year compensation OR a percentage between 1%-3% with at least 3% being contributed in 3 out of any 5 year period; or

• 2% of each employee's compensation whether or not the employee makes any salary reduction contributions.

 

 

All amounts in an employee's account are immediately vested upon contribution. No other types of plans can be maintained by the employer. All amounts in an employee's account are immediately vested upon contribution. This plan is easily utilized to make larger contributions for the benefit of shareholder-employees.

 
Simplified Employee Pension (SEP): Annual contribution per employee is limited to the lesser of 15% of compensation (up to $170,000 of compensation in 2000) or $30,000. The plan can be adopted as late as the tax return filing date for the year the plan is to be effective. All amounts in an employee's account are immediately vested upon contribution.

Qualified Plans:Qualified plans have many requirements that must be followed in order for the contributions to be deductible to the employer and not includible in compensation to the employee.
 

Defined Benefit Pension Plan: Contributions are based upon the amount of the benefit to be received by each participant at retirement. Annual contribution per employee is generally limited to the lesser of 25% of compensation (up to $170,000 of compensation in 2000) or $30,000. Although large contributions can be made for older employees looking to retire soon, this plan is heavy on administrative fees.

Defined Contribution Plan: Contributions are based upon a set contribution formula. Annual contribution per employee is limited to the lesser of 25% of compensation (up to $170,000 of compensation in 2000) or $30,000. This plan is usually set up as a 10% money purchase contribution (where the contribution must be made) and a 15% profit-sharing contribution (where the employer can contribute a lesser percent - including 0% - on a yearly basis) to provide flexibility to the employer.

401(k): On an annual basis, each employee can have the employer either contribute up to $10,500 (2000 limit) to the plan or be paid to the employee as cash compensation. All amounts contributed to the plan are not taxable until withdrawn.

SIMPLE 401(k): This plan is a modification of a SIMPLE IRA plan, except that the employer can annually contribute up to 15% of an employee's compensation (up to $170,000 of compensation in 2000) rather than being limited to 3%. The disadvantage to this type of plan over the SIMPLE IRA plan is that, unlike the SIMPLE IRA, the SIMPLE 401(k) is a qualified plan. All amounts in an employee's account are immediately vested upon contribution. No other types of plans can be maintained by the employer.

KEOGH (HR10): The annual contribution per employee is limited to the lesser of 15% of compensation (up to $170,000 of compensation in 2000) or $30,000. This plan was previously most widely used by sole proprietors but has lost much of its appeal as other non-qualified plans have been developed.