Qualified plans have attractive tax advantages for both employers and employees, and ERISA provides important benefits protection for all participants. Unfortunately, high administrative costs and complex rules have often discouraged small business owners from adopting a qualified retirement plan, putting them at a disadvantage in hiring and retaining good employees. Congress recognized this dilemma and made available two plans that are easier to establish and less costly to manage than traditional qualified plans: the simplified employee pension (SEP) and the savings incentive match plan for employees (SIMPLE).
In addition to these plans, which were specifically designed for small employers, defined benefit plans have come to be a popular option for small business owners. Due to their administratively complex nature and the costs associated with their funding requirement, both traditional defined benefit plans and cash balance plans have traditionally been used by larger, well-established firms. Today, however, it is not uncommon to see variations of these plans being implemented at small- and mid-size firms where the employer-owner's objectives are to control plan costs while maximizing plan benefits for themselves. These plans can be particularly attractive for business owners with adequate cash flows who are looking to save amounts for their own retirement beyond what can be saved in defined contribution, SEP, or SIMPLE plans.