Tips on Obtaining Your First Business Loan

by Barry Harlow

Employer sponsored retirement plans often intimidate small business owners. The entrepreneurs I know are busy maintaining and growing their businesses.

They aren’t benefits experts and they may assume such plans are costly and complex, or pose an administrative burden.

That might explain why only 29 percent of full-time employees in companies with fewer than 25 employees work at firms that sponsor retirement programs, according to an August, 2005 report by the Small Business Administration.

The reality is there are retirement plans to suit the size, financial situation, and administrative ability of every small business.

By sponsoring a workplace retirement plan, you may be able to better pursue a wide range of important goals, such as attracting and retaining employees, and helping your employees prepare for a financially secure future.

Retirement plans also can be tailored to meet your business finances and profile. For example, if you’re a business that experiences high employee turnover, you may want to adopt a plan that has a vesting schedule for your contributions. A schedule will require an employee to work a certain period of time in order to take contributions with them if they decide to leave your company.

Of the three main types of retirement plans, SEP-IRAs and SIMPLE IRAs are the least expensive and most convenient to administer. A Simplified Employee Pension plan (SEP-IRA) is often ideal for a one-person business or a business with just a few employees. It is relatively inexpensive and easy to start and administer. The employer—not the employees—contributes to a SEP-IRA. Employees are immediately vested, and each employee decides how his or her money is to be invested. In 2006, the annual contribution limit for each employee was 25 percent of compensation (or, for the self-employed, net earnings) or $44,000, whichever is less. In 2007, the annual contribution cap increases to $45,000.

SEP-IRAs also offer small-business owners flexibility regarding both the amount and timing of contributions. As a result, a SEP-IRA may make sense for a business with profits that tend to fluctuate from year to year.

The Savings Incentive Match Plan for Employees (SIMPLE IRA) is also valued for its ease of administration and is available to businesses with 100 or fewer employees. A so-called “matching” SIMPLE IRA plan allows employees to contribute up to $10,500 (for 2007). The employer must then make a matching contribution of up to 3 percent of each worker’s annual compensation, but has the right to match as little as 1 percent in two out of any five consecutive years.

The other method for funding a SIMPLE IRA requires the employer to make non-elective contributions equal to 2 percent of compensation for each worker who has earned at least $5,000 during the year, whether or not a worker has elected to contribute income. The maximum compensation amount used to determine the contribution amount in 2006 was $220,000 and in 2007 is $225,000.

Qualified plans, also known as Keogh plans, are more complex than SEP-IRAs or SIMPLE IRAs; and therefore, have more stringent reporting requirements. Today the most popular type of qualified plan is a defined contribution plan—employers make contributions into individual accounts for each employee. Employees may then be given the authority to invest the money as they see fit. Defined contribution plans do not require immediate vesting and may allow employee loans.

Two common types of plans are profit sharing plans and 401(k) plans. Profit sharing plans give employers the flexibility of varying the amount and frequency of contributions based on fluctuating profits. 401(k) plans allow employee contributions (or “elective deferrals”). In recent years, 401(k)-style plans have become less complex and less expensive for smaller businesses.

If you’re uncertain about which plan is right for your business, there are plenty of experienced financial professionals who can help choose a plan that’s right for you.

Barry Harlow is manager of TD Ameritrade.
P | 800.934.4448 option 8, ext. 81558
E | barry.harlow@tdameritrade.com