Choosing a Retirement Plan for a Small Business
If you’re a business owner, have you planned for your own retirement and that of your employees?
Several options are open to a small business owner who wants to start a company retirement program. Each has
advantages and disadvantages. Selecting the best-suited plan is a matter of considering funding costs, tax
consequences, administrative requirements and, of course, the needs of your company and employees.
A “qualified” or “tax-qualified” plan is one in which contributions are tax-deductible and there’s no tax on income
earned by the plan’s assets until the employee begins receiving payments.
A qualified plan can be a “defined benefit” or a “defined contribution” plan. A defined benefit plan is one in which
the amount the participant will receive upon retirement is set (defined) by a formula. The formula usually is derived
from the retiree’s length of service and average pay over the last several years of employment. A common form of
defined benefit plan is the traditional company pension that pays retirees a guaranteed sum for life. Defined
benefit plans can be expensive and administratively complex, so they are generally used in limited cases, such as
when an owner is nearing retirement and needs to make large contributions.
A defined contribution plan is more common. The amount of the employer/employee contribution is set (defined) at a
particular level, for example, as a percentage of compensation. The employer bears no responsibility for the
performance of the product funding the plan.
Defined contribution plans include profit-sharing, 401(k) plans, Owners 401(k), SEP-IRA and others. Generally,
qualified retirement plans must be available to all full-time and certain part-time employees. The amount of annual
contributions are limited by law.
Non-qualified deferred compensation plans are those that a business offers to only certain employees—usually the
owners and other highly-compensated employees. The contributions to such plans are not tax-deductible in the year
they are made. However, depending on the plan type, interest that accrues in these types of plans may be tax-
As with other important financial decisions, selecting the suitable retirement program for your business requires
careful examination of all options. This article is intended only to touch briefly on some of the options available to
small business owners and self-employed people. You should consult appropriate professionals (tax advisors or other
financial and legal advisors) before deciding what’s best for you and your business.
A little planning today can make a world of difference tomorrow.
AXA Advisors, LLC does not provide legal or tax advice. Please consult your tax or legal advisor regarding your
Jason M. Christensen offers securities through AXA Advisors, LLC(member NASD, SIPC) 120 South Lakeshore Drive,
Suite 102 Lake City, MN 55041 and offers annuity and insurance products through an insurance brokerage affiliate,
AXA Network, LLC and its subsidiaries.
GE-36223 (07/06)(Exp. 07/08)