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Starting a Retirement Plan for a Small Business

Whether the business is large or small, retirement plans are a major part of an employer’s overall benefit package. They help attract and retain qualified employees and give employees a tangible incentive to increase productivity because their future retirement security is tied to long term employment and the success of the company. Even if your business is small, offering a retirement program is a good strategy for retaining workers of all ages, including mature workers.

If your small business does not offer a retirement program but is interested in doing so, this information will help you get started.

Governance and Oversight

The regulation of qualified retirement plans is handled jointly by three government agencies: the Internal Revenue Service (IRS), the Department of Labor (DOL), and the Pension Benefit Guaranty Corporation (PBGC). In particular, the IRS offers tax incentives to employers and employee organizations to encourage the establishment of qualified retirement benefit plans.

What Is a Qualified Retirement Plan?

There are several types of qualified retirement plans. The “best” plan for an employer depends on such factors as the profit patterns of the business and the size and makeup of the employee group. To qualify for favorable tax treatment, a plan must comply with certain IRS rules and regulations, and while some requirements apply only to certain types of plans, most apply to all. The four most significant requirements concern:

• Minimum standards of coverage for employees (minimum participation requirements).
• Minimum standards on vesting (non-forfeit ability of earned benefits).
• Rules for minimum contributions and benefits.
• Minimum standards for funding (to ensure funds will be available to pay benefits).

In addition, generally, a qualified plan must:

• Be in writing
• Be communicated to the participants covered by the plan
• Be for the exclusive benefit of participants or their beneficiaries
• Ensure that funds cannot be diverted to purposes other than providing benefits for participants or their beneficiaries
• Prohibit assignment of benefits
• Contain a claims procedure
• Not discriminate in favor of officers, shareholders, or other highly compensated employees
• Meet various reporting requirements
• Provide annual reports concerning the plan’s status with the IRS, DOL, and PBGC

Qualified retirement plans that meet certain requirements of the Internal Revenue Code traditionally fall into three major categories:

• Defined Benefit Plan: The benefits provided at retirement are established in advance by a formula selected by the company.
• Defined Contribution Plan: The company agrees to contribute on behalf of each participant a specific dollar amount or a selected percentage of compensation each year. A 401(k) Plan, Money Purchase Pension, Target Benefit Pension, Profit-Sharing, Stock Bonus, and Employee Stock Ownership Plans are examples of defined contribution plans.
• Savings/Thrift Plan: The employees contribute directly toward their retirement benefits.

Most defined benefit plans are covered by the PBGC plan termination insurance, which, should the plan sponsor’s plan end,, will pay the monthly retirement benefits up to a guaranteed maximum number of retirees. This insurance is responsible for the current and future pensions of about 1,271,000 people. Note: Defined contribution plans are not covered by the PBGC plan termination insurance.

Get Professional Help in Setting Up a Retirement Plan:

In setting up a retirement plan, it is important to get legal advice to make sure the plan complies with IRS and DOL rules. An actuary and a benefits consultant can help design a plan that will be attractive to workers of all ages. The actuary will analyze your workforce to help project how long workers will live, how many will retire early, and how many will take a lump sum payment instead of a monthly pension. You will also need someone to manage the plan’s investments, administer the plan, and communicate with employees about saving and investing for retirement.

Resources

Meeting Your Fiduciary Responsibilities
This fact sheet by the DOL provides a simplified explanation of the ERISA laws and regulations for plan sponsors concerning administering and managing the assets of a pension program.

How To Obtain Employee Benefit Plan Documents From DOL
View, copy, and/or order the annual report forms required by DOL/ERISA for pension plan sponsors of retirement programs.

Pension Benefit Guaranty Corporation (PBGC)
Provides information about PBGC, its mission, insurance premiums for employers that sponsor insured pension plans, and related requirements.

Private Pensions: Most Employers That Offer Pensions Use Defined Contribution Plans (Adobe Acrobat required)
A Government Accounting Office report giving information on the approaches that private sector employers are using to provide retirement benefits and trends.

Employer Benefit Research Institute (EBRI)
EBRI has conducted research on retirement plans since its founding in 1978 and is an excellent resource.