Simplified Employee Pension (SEP) and SIMPLE Plans: Retirement Solutions for Small Businesses

If you're looking for a retirement plan for yourself and your employees but are concerned about financial commitment and administrative burdens, consider the Simplified Employee Pension (SEP) and Savings Incentive Match Plan for Employees (SIMPLE). These plans offer ease of administration and flexible contribution options, making them attractive for small businesses.

SEP: Simple and Flexible

A SEP is easy to set up and manage. It allows employers to make discretionary contributions each year, providing flexibility based on the business's financial situation. Here are the key features:

1. Easy Setup: Use the IRS model SEP, Form 5305-SEP, which doesn't need to be filed with the IRS. This form satisfies SEP requirements, although you can choose an individually designed SEP if needed.

2. Tax Benefits: Employers get a current income tax deduction for contributions made on behalf of employees. Employees are not taxed on contributions until they take distributions, usually at retirement.

3. Contribution Limits: For 2024, the maximum deductible contribution is the lesser of 25% of compensation or $69,000 per employee. Note that the calculation varies slightly for business owners who don't receive a W-2, such as sole proprietors.

4. Employee Control: Employees control their SEP IRAs, including investment decisions and tax-deferred earnings. However, they cannot make their own contributions to the SEP.

5. Minimal Administration: SEPs require fewer records than traditional plans, no annual IRS reports, and simpler recordkeeping that can be managed by a trustee, such as a bank or mutual fund.

SIMPLE Plans: Another Retirement Option

For businesses with 100 or fewer employees, SIMPLE plans offer another option. They allow employee contributions and require annual employer contributions. Here's what you need to know:

1. SIMPLE IRAs: Employees can contribute to their SIMPLE IRAs through a qualified salary reduction arrangement, with the employer making matching contributions. SIMPLE IRAs have less stringent requirements than traditional retirement plans.

2. Contribution Limits: For 2024, employee deferrals are limited to $16,000, with an additional $3,500 catch-up contribution allowed for employees aged 50 and older.

3. SIMPLE 401(k): Similar to SIMPLE IRAs, these plans are not subject to complex nondiscrimination rules and offer the same contribution limits.

Key Considerations

• Timing: There's still time to see tax savings on your 2023 tax return by establishing and contributing to a SEP by the extended due date of your return. For example, if you're a sole proprietor and extend your 2023 Form 1040 to October 15, 2024, you have until then to set up and contribute to a SEP, which you can deduct on your 2023 return.

• Employee Participation: For both SEPs and SIMPLEs, all eligible employees must participate, and contributions should not favor highly compensated employees.

Contact Us

Additional rules and limits apply to both SEPs and SIMPLEs. Contact our office for more information and personalized advice to determine which retirement plan is best for your business.