Only 46 percent of employees in small businesses are covered in an employer-based plan, versus nearly 80 percent of full-time employees in medium- and large-sized firms, according to the U.S. Department of Labor. A 2001 Dunn & Bradstreet study says only 17 percent of small businesses offer plans. Small-business owners cite numerous reasons why they don't offer plans, including that their employees prefer the wages or other benefits, revenue is too uncertain, it costs too much to administer and contribute to, and there are too many regulations.

Surveys also indicate that employers aren't very familiar with alternatives to the most commonly used 401(k), such as the savings incentive match plan for employees (SIMPLE) and simplified employee pensions (SEPs), which not only can work well for a corporation but sole proprietorships and partnerships. Experts add that many small employers don't realize that companies with retirement plans tend to employ workers who are more stable and loyal, which can help the company be more productive in the long run in a highly competitive market.

Several provisions in the 2001 Tax Relief Act, overshadowed by publicity on changes in personal tax rates, the estate tax and college funding, make retirement plans more attractive say CERTIFIED FINANCIAL PLANNER™ professionals who serve small-business owners. The provisions not only allow owners to provide plans attractive to employees at a smaller cost, but owners will be able to better fund their own retirement. Among the new provisions:

Owners of businesses with 100 or fewer employees can take a tax credit for qualified start-up costs of up to $500 in each of the first three years of the plan. In addition, new plans won't have to pay an IRS user fee (up to $700) when applying for a determination letter.

Owners can now take up to a 25 percent tax deduction for contributions to defined contributions plans such as a 401(k) or profit sharing plan, versus 15 percent before 2002. Experts say this will make it more inviting for owners who have operated side-by-side money purchase and profit sharing plans in order to get a 25 percent tax deduction to drop the less flexible and more costly money purchase plan, which requires minimum contributions for participants even in bad years. The increase also should indirectly help reduce excise tax penalties on nondeductible contributions.

In another important change, wage deferrals into 401(k) plans, SIMPLE plans and others won't count toward the employer's 25 percent tax deduction limit. Thus, employers who can afford to heavily fund a profit-sharing plan may want to consider adding a 401(k) plan into which the owner can defer a portion of his or her own salary.

In the case of 401(k) plans, the maximum total annual amount that an employee can defer from wages and the owner can contribute on behalf of an employee has risen from the lesser of 25 percent of the employee's pay or $35,000 to 100 percent or $40,000. In addition, the new law boosted the total amount of employee compensation that may be considered when calculating an employee's contribution, from $170,000 to $200,000. That amount will be adjusted for inflation in subsequent years.

Employees (including the owner) can contribute more annually into their retirement plans. For example, they can put up to $11,000 into their 401(k) or SEP in 2002, and that will rise to $15,000 by 2006. Employees 50 and older can contribute another $1,000 as part of the new "catch-up" provision, and those catch-up provisions generally are exempt from nondiscrimination testing.

Owners in partnerships and S corporations will be now able to take plan loans, if allowed by the plan-something only their employees could do in the past. Of course, it's usually best to avoid borrowing from your retirement plan, but owners strapped for cash for the business may find this an appealing provision.

"Top-heavy rules," which can restrict contributions for owners and other highly paid key employees, also have been eased under the new act.

Several new provisions affecting defined-benefit plans, such as increased funding limits and maximum annual plan benefits, should make these less popular small-business plans more attractive.