If you’re considering creating a retirement plan for yourself and your employees but you’re concerned about the cost and administrative hurdles involved, take heart: there are some good options available to you.
In this article, we’ll explore two types of plans that small business owners can use to get the ball rolling with retirement: Simplified Employee Penson (SEP) and Savings Incentive Match Plan for Employees (Simple).
A SEP is designed to be a viable alternative to “qualified” retirement plans and is geared toward small businesses. The relative ease of administration with this plan and your decision as an employer on whether or not to make annual contributions are two features of the plan that can be appealing to business owners.
SEP setup can be easy for business owners
If your business doesn’t already have a qualified retirement plan, you can set up a SEP by using the IRS model SEP, Form 5305-SEP. When you adopt and implement this model SEP, which isn’t required to be filed with the IRS, you will satisfy the SEP requirements.
This means that as the employer, you’ll get a current income tax deduction for the contributions you make on behalf of your employees. Employees won’t be taxed when contributions are made but will be taxed in the future when they receive distributions, typically at retirement.
Depending on your requirements, an individually designed SEP might be a better choice for you than the model SEP.
When you set up a SEP for yourself and your employees, you’ll make deductible contributions to every employee’s IRA, known as a SEP-IRA, which are required to be approved by the IRS. The maximum amount of deductible contributions one can make to an employee’s SEP-IRA (and that the employee can exclude from income) is the lesser of either 25% of compensation or $66,000 for 2023.
The deduction for your contributions to your employee’s SEP-IRA isn’t limited by the deduction ceiling that’s applicable to an individual’s contribution to a regular IRA. Your employees have control over their individual IRAs and IRA investments, on which the earnings are tax-free.
There are additional requirements that must be met in order to be eligible to set up a SEP:
- All regular employees must elect to participate in the program
- Contributions must not discriminate in favor of highly compensated employees
The requirements for creating a SEP are minor, though, compared to the administrative and bookkeeping burdens that come with traditional qualified pension and profit-sharing plans.
The detailed records that traditional plans are required to maintain in order to comply with complex nondiscrimination regulations are not not necessary with a SEP. Employers aren’t required to file annual reports with the IRS (which, in the case of a pension plan, could require the services of an actuary). Instead, all required recordkeeping can be handled by a trustee of the SEO-IRAs, usually a mutual fund or a bank.
Consider SIMPLE plans
Another viable option for businesses with fewer than 100 employees is a SIMPLE plan. With these plans, a “SIMPLE IRA” is established for each eligible employee. The employer makes matching contributions based on the contributions chosen by participating employees under a qualified salary reduction arrangement.
Like a SEP, a SIMPLE plan also comes with much less stringent requirements than traditional qualified retirement plans.
Another option is for an employer to adopt a “simple” 401(k) plan, with features similar to a SIMPLE pan, which creates an automatic passage over the otherwise complex nondiscrimination test for 401(k) plans.
For 2023, SIMPLE deferrals are allowed up to $15,500 plus an additional $3,500 for catch-up contributions available to employees aged 50 and older.
Questions about retirement savings? Smolin can help.
If you’re looking for manageable options to help create retirement plans for yourself of your employees, contact Smolin today. Our knowledgeable team of accounts can help you decide which plan works best for you and walk you through the process.