Operating a small business? Consider opting for a SEP or SIMPLE retirement plan.
Are you looking for a way to reduce your business income or employment taxes? Or want to reward current employees and attract quality talent? Traditional 401(k)s are great but can be expensive and there is more administration and paperwork involved. But there are far less costly retirement plans which may meet your needs. They are the Simplified Employee Pension (SEP) or a Savings Incentive Match Plan for Employees (SIMPLE).
SEPs offer easy implementation
The appealing feature of a SEP is the relative ease of administration and the discretion that you, as the employer, are permitted in deciding whether or not to make annual contributions.
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. 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 employees control their SEP-IRAs and investments, the earnings on which are tax-free.
Your business will 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.
If you don’t already have a qualified retirement plan, you can set up a SEP by contacting any bank or mutual fund company (Schwab, Fidelity, Vanguard, etc.) and they will provide you with the documents needed to establish the plan.
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. The employee can elect to defer a portion of their wages pre- tax, with the employer making matching contributions.
The SIMPLE plan is also subject to much less stringent requirements than traditional 401(k) or 403(b) 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.
SEP and SIMPLE plans offer unique advantages for small business owners and their employees. Neither plan requires annual filings with the IRS. Contact your Wegner CPA tax advisor for more information or to discuss other issues/concerns related to retirement plans.
