SEP's provide a simplified method for you to make contributions to a retirement plan for your employees. Instead of establishing a formal retirement plan, you can adopt a SEP agreement and make contributions directly to a traditional Individual Retirement Account (IRA) set up for each eligible employee.

A SIMPLE plan can be established by an employer who had 100 or fewer employees who received at least $5,000 in compensation from the employer in the preceding calendar year and who meet certain other requirements. Under a SIMPLE plan, employees can choose to make salary reduction contributions rather than receiving these amounts as part of their regular pay. In addition, you will contribute either a matching or non-elective employer contribution. There are two types of SIMPLE plans: SIMPLE IRA and SIMPLE 401(k) Plan.

The Qualified Retirement Plan rules are more complex than the SEP plan and SIMPLE plan rules. However, there are advantages to qualified plans, such as increased flexibility in designing plans and increased contribution and deduction limits in some cases.

What drives an employer to set up a qualified retirement plan?

The answer to that question is as varied as the employers establishing these plans. Generally, they focus on a key fact: qualified retirement plans have unique tax benefits that are not available in any other business or financial structure.

The tax planning opportunities include the following:

• Employer contributions are deductible when contributed into the plan's trust.
• The investment earnings of the assets in the qualified plan grow on a tax-deferred basis.
• Plan participants are not taxed on the accumulations in the plan, even if vested, until they receive the benefits as payments.
• When benefits are paid, most participants may further delay the taxation on those benefits by rolling over the payments to an IRA or another qualified retirement plan.

In addition, there are other benefits to be derived by sponsoring a qualified retirement plan including:

• Opportunity for employees to contribute to the plan on a tax deferred basis.
• Increased employee morale.
• Reduced staff turnover.
• Attracting valuable new employees.

The net effects of establishing a qualified retirement plan are as follows: the employer may receive a tax credit up to a certain limit upon establishment of a plan; the employer receives an income tax deduction for any contributions to the plan; the plan assets grow tax-deferred; and employees receive valuable retirement benefits that may increase in value the longer the employee is employed with the employer.

There are two basic kinds of qualified plans: Defined Contribution Plans and Defined Benefit Plans.