Suppose you’re thinking about setting up a retirement plan
for yourself and your employees. However, you’re concerned about the financial
commitment and administrative burdens involved. There are a couple of options
to consider. Let’s take a look at a Simplified Employee Pension (SEP) and a
Savings Incentive Match Plan for Employees (SIMPLE).
SEPs offer easy implementation
SEPs are intended to be an attractive alternative to
“qualified” retirement plans, particularly for small businesses. The appealing
features include the relative ease of administration and the discretion that
you, as the employer, are permitted in deciding whether or not to make annual
contributions.
If you don’t already have a qualified retirement plan, you
can set up a SEP just by using the IRS model SEP, Form 5305-SEP. By
adopting and implementing this model SEP, which doesn’t have to be filed with
the IRS, you’ll have satisfied the SEP requirements. This means that as the
employer, you’ll get a current income tax deduction for contributions you make
on your employees’ behalf. Your employees won’t be taxed when the contributions
are made but will be taxed later when distributions are received, usually at
retirement. Depending on your needs, an individually-designed SEP — instead of
the model SEP — may be appropriate for you.
When you set up a SEP for yourself and your employees,
you’ll make deductible contributions to each employee’s IRA, called a SEP-IRA,
which must be IRS approved. The maximum amount of deductible contributions you
can make to an employee’s SEP-IRA in 2025, and that he or she can exclude from
income, is the lesser of 25% of compensation or $70,000. The deduction for your
contributions to employees’ SEP-IRAs isn’t limited by the deduction ceiling
applicable to an individual’s contributions to a regular IRA. Your employees
control their individual IRAs and IRA investments, the earnings on which are
tax-free.
You’ll have to meet other requirements to be eligible to set
up a SEP. Essentially, all regular employees must elect to participate in the
program, and contributions can’t discriminate in favor of highly compensated
employees. But these requirements are minor compared to the bookkeeping and
other administrative burdens associated with traditional qualified pension and
profit-sharing plans.
The detailed records that traditional plans must maintain to
comply with the complex nondiscrimination rules aren’t required for SEPs. And
employers aren’t required to file annual reports with the IRS, which, for a
pension plan, could require the services of an actuary. The required
recordkeeping can be done by a trustee of the SEP-IRAs — usually a bank or
mutual fund.
SIMPLE plans meet IRS requirements
Another option for a business with 100 or fewer employees is
a Savings Incentive Match Plan for Employees (SIMPLE). Under these plans, a
SIMPLE IRA is established for each eligible employee, with the employer making
matching contributions based on contributions elected by participating
employees under a qualified salary reduction arrangement. The SIMPLE plan is
also subject to much less stringent requirements than traditional qualified
retirement plans. Or, an employer can adopt a SIMPLE 401(k) plan, with similar
features to a SIMPLE IRA plan, and avoid the otherwise complex
nondiscrimination test for traditional 401(k) plans.
For 2025, SIMPLE deferrals are allowed for up to $16,500
plus an additional $3,500 catch-up contribution for employees age 50 or older.
Unique advantages
As you can see, SEP and SIMPLE plans offer unique advantages
for small business owners and their employees. Neither plan requires annual
filings with the IRS. Contact us for more information or to discuss any other
aspect of your retirement planning.
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