A SIMPLE Matter of Providing a Plan for Retirement

New rules that went into effect this month will make it easier for small companies to offer retirement plans to their workers. And already, both employers and mutual fund companies are gearing up to address the retirement needs of the millions of Americans employed by small businesses.

Fidelity Investments, for example, will start offering a full-service pension program under the new law, called the Savings Incentive Match Plan for Employees, which went into effect Jan. 1. The Boston-based mutual fund company has also been leading retirement-planning seminars to explain how small-business owners can use the new rules to start retirement plans for their workers.

Each of the half a dozen seminars held so far has been booked to capacity, and the fund company has received thousands of inquiries for written material about the new law, said Kathryn A. Hopkins, executive vice president of retail marketing at Fidelity Investments in Boston.

The need for a retirement savings vehicle is so great among employees of small companies that any new option is going to have an impact on the small-business marketplace, Hopkins said.

Although there are no definitive statistics, industry experts agree that the majority of workers at small companies are not covered by any pension plan.

David L. Wray, president of the Profit Sharing/401(k) Council of America, a trade group, estimates that about 15% of workers at companies with 500 or fewer employees have a pension. Access Research, an investment research company in New York, puts the proportion at closer to 20%.

Pension plans are common at large companies--80% to 90% of that work force has either a defined-benefit plan--the type that promises to pay set monthly benefits for life--or a defined-contribution plan such as a 401(k), in which benefit payments are based on how much was saved by the workers and their companies.

Small companies have said they don’t have the financial wherewithal to pay for defined-benefit plans, which are funded completely by sponsoring companies, nor the time or resources to administer defined-contribution plans. Under the old rules, defined-contribution plans had to be continually monitored to see that they met nondiscrimination tests designed to ensure that top managers weren’t favored over lower-wage workers. For small-business owners, the tests were onerous--requiring company managers to perform complex multi-part calculations with each worker’s pension contributions, Wray said.

But provisions in the minimum wage bill, which was signed into law last fall and became effective on the first of the year, changed that, reducing reporting requirements for all 401(k) plans and creating a new type of defined-contribution pension program specifically for companies with 100 or fewer workers. Employers that match worker contributions up to 3% of wages will be exempt from complicated discrimination testing requirements.

The program, called SIMPLE--for Savings Incentive Match Plan for Employees--may require no more than a standard one-page form to set up, according to attorney Richard Rydstrom of Rydstrom & Associates in Los Angeles.

These plans could be set up to work like a traditional individual retirement account--workers have virtually unlimited investment options for their retirement dollars----or like a 401(k), which allows the employer to limit workers’ investment options.

No matter the structure of the plan, the basic advantage for employees is this: Workers can contribute up to $6,000 of their annual pretax pay to a SIMPLE account. That is, the money contributed is not counted as part of the worker’s taxable income, resulting in a tax savings. Someone in the 28% federal tax bracket, for example, would save $1,680 in federal tax by contributing the maximum amount to the SIMPLE plan each year. In addition, the money saved in the account is not taxed until you begin withdrawing it when you retire.

Be advised, though, that if you have to withdraw money from a SIMPLE account in the first two years, you will get hit with some of the stiffest tax penalties around, says Philip J. Holthouse, partner at the West Los Angeles tax accounting firm Holthouse Carlin & Van Trigt. Whereas a pre-retirement withdrawal from a 401(k) plan is hit with a 10% federal tax penalty--in addition to ordinary income taxes on the amount withdrawn--a withdrawal made within two years of opening a SIMPLE plan will be subject to a 25% penalty, he says.

Wray speculates that because the employer’s 3% matching requirement is modest and within the range of the cost-of-living pay increases many companies have been providing to workers, many employers may decide to offer their employees the choice of a raise this year or matching contributions to a SIMPLE plan.

Indeed, the majority of about 600 small-business owners surveyed by Fidelity Investments said a SIMPLE plan would be likely to increase the number of small businesses offering retirement plans for employees. However, the same survey indicated that the majority of small-business owners--79%--were unaware of how the law had changed.

Need to educate your boss? To drum up new business, Fidelity is giving away booklets that explain both new and existing options. The booklet, “Retirement Plans for Small Businesses,” is free. To get a copy, call Fidelity at (800) 544-5373.

Kathy M. Kristof welcomes your comments and suggestions but regrets that she cannot respond individually to letters and phone calls. Write to her in care of Personal Finance, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or e-mail [email protected]