The Big Easy

A low-cost, no-hassle strategy to provide employees with retirement benefits.

Simplified employee pensions -- a low-cost, no-hassle strategyto provide employees with retirement benefits

Bill Buckingham had a problem. His Buckingham Computer Services Inc. was based in Midland, Mich., a community of just 37,000. "Dow Chemical is the employer in town, and I knew as we grew I'd be competing against it for a limited supply of qualified workers. That was going to be hard," Buckingham explains, "because it has all kinds of employee benefits -- the kind I couldn't afford to offer if I wanted to keep funneling cash into growing my business."

It wasn't just a question of money. Buckingham felt he was over his head when it came to choosing between the myriad benefits that could be offered to the employees of his computer-training and -service business. Worse still, he knew that his company lacked the management resources to administer any of them internally. Fortunately, he came across a government pamphlet that described a plain-vanilla benefit known as the simplified employee pension (SEP) plan.

"I liked it from the start," he recalls. "It was so straightforward and simple to figure out that I could see it would take a little time to research it and make some decisions -- and then I'd be able to very quickly shift my attention back to what mattered, running and gunning my business."

Less than 20% of people employed by small companies have any type of pension coverage, according to the U.S. Small Business Administration, compared with more than 80% of those working for large corporations. That puts smaller businesses at a real disadvantage when it comes to hiring in competitive job markets, and Buckingham knew it.

Fortunately, SEPs, which operate like a cross between individual retirement accounts and corporate profit-sharing plans, offer an attractive alternative for growing companies. The paperwork and cost that are involved in setting up and administering SEPs are minimal. So are employer requirements. That means companies are free to adjust their annual contributions or even skip them entirely as business conditions warrant. Best of all, because of often-overlooked tax benefits, SEPs can actually improve bottom-line results for companies like Buckingham Computer.

Bill Buckingham started researching SEPs about five years ago, when his company had big growth plans but only 3 employees, including him and his wife. (The company, which made the 1988 Inc. 500 list, now has 55 employees, offices in five states, and $3 million in sales.) Although Buckingham didn't know much about the minutiae of employee benefits, he had formulated a checklist of requirements that made sense for his company.

"I wanted a plan that would be so simple and standardized that it would be easy for me to explain as a good thing to my employees or job candidates," he says. "I also wanted everyone to receive the same share, so there wouldn't be any hassles about fairness." Because Buckingham himself had been forced to sacrifice his retirement benefits when he stopped working for a large corporation, he wanted his employees to be able to take their funds with them if they decided to move on. "And since we were a young company, I didn't want to waste money on legal fees or administrative costs for running the program."

As he started talking to local brokerage houses about the plans they offered, it was clear that SEPs satisfied all of his basic requirements.

To see why, look at how a SEP works. Employers like Buckingham contract with a financial services organization (generally, a brokerage house, mutual fund company, or insurance firm) to administer what is known as a prototype SEP plan. Many providers will set up the plan at no cost to the company; they receive their income later in the form of annual administrative fees that are charged to participating employees, not to the employer. Because SEP plans are standardized, there's no need to hire a lawyer to write a costly plan description and file it with the Internal Revenue Service. In fact, all that's involved in starting a plan is providing the administrator with a list of qualified employees (generally those who have at least three years' tenure with the employer).

Once a plan is in place, employers make annual contributions as they wish to the retirement accounts set up in each employee's name. Contributions are tax advantaged in two important ways: they are tax deductible as a business expense, and, although they are a form of workers' compensation, they are free from any payroll taxes.

Employer contributions can range during any particular year from zero to 15% of each employee's salary, up to a maximum of $30,000 per employee. By law, though, every employee must receive the same percentage contribution, as long as he or she has worked for the company for three of the past five years and has earned at least $342 a year. (The minimum amount increases each year according to an inflation index.) Just as with IRAs or 401(k) accounts, employees must wait until they reach age 59½ to withdraw SEP funds or else pay tax penalties. If they switch jobs, they can roll over their SEP funds into IRAs without incurring any tax liabilities.

 1 | 2  NEXT