Employer-sponsored retirement plans can further enhance your business. By helping your employees build future financial security through a work-related benefit, you may increase the likelihood that valued employees will make a long-term commitment to your business.

Plan design will generally depend on how your business is structured (form of business entity), the number of workers you employ, and your ability to make contributions on behalf of employees.

Qualified retirement plans (meeting IRS regulations and thus eligible for favorable tax treatment) are structured as either defined benefit or defined contribution arrangements. Contributions (up to certain limits established by law) in both types of plans are tax deductible to the employer as ordinary business expenses, and funds grow on a tax-deferred basis.

A defined benefit plan is the classic, traditional pension, typically funded entirely by the employer. At retirement age, the company pays the employee a fixed, lifetime income, the amount of which generally depends upon length of service and highest attained salary. In this type of plan, the company assumes the responsibility for making sure that money will be available to fund a pension for retiring workers.

By comparison, a defined contribution plan does not promise a fixed lifetime pension, but rather only that "contributions" (the company's, the employee's, or some combination of both) will be made to a retirement account in the employee's name. A 401(k) plan, for example, is a defined contribution plan in which employees contribute a percentage of their salary (on a pre-tax basis subject to certain contribution limitations as dictated by the company's plan) and the company may, at its discretion, make matching contributions. The employee chooses from a menu of investment options and the company assumes no responsibility for the ultimate size of the retirement account.

One alternative—a simplified employee pension (SEP)—may be attractive to employers with limited financial resources and few employees. In a SEP arrangement, the employer makes contributions to the IRAs (Individual Retirement Acounts) of participating employees. Typically, each SEP is owned in the name of the individual employee. SEPs generally have low start-up costs and low annual administrative costs.

Qualified defined contribution plans may not discriminate in favor of highly compensated executives so contribution limitations are imposed for all plan participants.

A sole proprietor typically will use either a Keogh or a SEP as a qualified retirement. A Keogh offers greater flexibility in plan design (may be either profit-sharing, money-purchase, or defined benefit) but requires more record keeping and IRS filings than a SEP. A Keogh also entails potential fiduciary responsibilities (in that the employer chooses the plan trustee), while a SEP does not (that is, the employee chooses his or her own plan trustee by virtue of setting up their own IRA account).