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Plan Details
Maintaining your plan, 1. key things to know.
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Eligibility
- Small business owners who are comfortable making all of the contributions. The SEP IRA is funded only by employer contributions, not by employee salary deferral.
- Self-employed individuals who are interested in contributing more to their retirement savings than a traditional or Roth IRA allows but do not want the administrative responsibilities of a 401(k).
- An individual who participates in their employer's retirement plan can open a SEP IRA if they have self-employed income.
If the business owner wants to have more restrictive eligibility requirements, or allow employees to participate in a salary deferral feature.
The notification requirements are clearly defined in the 5305-SEP form .
- The employer must fill out and retain IRS Form 5305 SEP for their records
- The employer is required to notify the employee of any contributions made. Notification requirements are described in IRS Form 5305-SEP .
- There are no SEP IRA-specific employer tax filings (unlike a 401(k)).
- Employers deduct SEP contributions on their business tax filing.
- SEP IRA contributions are made at the discretion of the employer, and are not required to be annual or ongoing.
- An employer may establish a SEP IRA for an employee who is entitled to a contribution under the SEP plan even if the employee is unable or unwilling to establish a SEP IRA per IRS rules. See 5305-SEP
- See Maintaining your plan for more information.
Account Opening
Accounts can be opened online or by form .
Employees are responsible for opening their own SEP IRA accounts and providing the account number to the employer.
Contributions
- Self-employed individuals or small businesses that are structured as sole proprietorships, partnerships, C corporations and S corporations can establish and contribute to a SEP IRA.
- Have reached age 21
- Have performed services for your business in 3 or more of the last 5 years
- Have received at least $600 in compensation from your business during the current year
- Be covered under collective bargaining agreements
- Be non-resident aliens that did not earn U.S. sourced income
- Be employees who receive less than $450 in compensation
- The owner/employer is also considered an employee and must meet the same eligibility requirements.
- For any contributions to be made, all eligible employees must be included.
Yes, you can contribute to both a SEP IRA and either a traditional IRA or Roth IRA (presuming you meet income limit requirements) in the same year. The deductibility of traditional IRA contributions may be impacted by the SEP IRA contribution.
- The maximum contribution is 25% of compensation.
- The definition of compensation differs with business structure.
- All eligible employees must receive the same percentage of compensation.
- Use the SEP IRA Contribution Worksheet (PDF) to help you determine the amount you may be able to contribute.
- Mobile check deposit through Fidelity mobile app (account owner must log in)
- Electronic funds transfer (ETF) from a personal bank account (generally only for sole proprietors.)
- On Fidelity.com from an individual account (only for Sole Proprietors)
- By check, mailed or deposited at an investor center. ( Deposit Slip ) If funding multiple accounts with one check, please include a spreadsheet with the instructions to split between accounts.
- By BillPay from a business bank account that mails a check
- By phone through a representative from a corporate account, and other accounts depending on business structure (certain limits apply)
Fidelity reports SEP IRA contributions on IRS Form 5498 in the year they are made, which may not be the deduction year. A common misconception is that the reporting should mirror the contribution year reporting for traditional and Roth IRAs. It is the employer's responsibility to claim the deduction for the appropriate tax year.
Investments
- Employees are responsible for investing their own SEP IRAs. The employer has no further responsibility after making the contribution.
- After funding the account, you can select from a wide range of investment options. These include Fidelity and non-Fidelity mutual funds along with stocks, bonds, ETFs, and CDs.
- To learn more about your investment options
- Inside the account you can establish automatic investments from the cash core to a mutual fund.
- Sole proprietors can establish automatic contributions from a bank account by mailing a form.
- You can send contributions by using a Billpay service that mails recurring checks from your business bank account. Monitor payments to avoid IRS penalties for over-contributing.
Withdrawals
- The rules for withdrawal are the same as for a traditional IRA.
- Assets in the account can be withdrawn at any time, however a 10% early withdrawal penalty may apply if you are under the age of 59 ½, unless one of the penalty waivers applies (see IRS Publication 590-B ). Minimum distributions are required starting at age 73.
You can make withdrawals from your SEP IRA online , or by using our one time withdrawal form .
Maintaining your SEP IRA plan
A Simplified Employee Pension plan (SEP IRA) is a small business retirement plan, appropriate for sole-proprietors, corporations or partnerships that are either owner only or small businesses with only a few employees. A SEP IRA may be the easiest small business plan to set up and maintain, but there are steps you must take to ensure you're running the plan properly. The list below doesn't necessarily cover all of your responsibilities. You may want to consult the IRS or a qualified tax advisor if you have additional questions.
Employer responsibilities
1. Establish your plan
- To establish your plan, you as the employer must fill out and retain Form 5305 SEP (PDF) by your business' tax filing deadline (including extensions, if filed). Each employee eligible for participation must open a SEP IRA account. A link to the SEP IRA application can be found here: Open an Account with Fidelity Log In Required . Note: The SEP IRA accounts are in the name of the participating employee only. Neither the company's name nor tax ID appear on the account. If you're the employer, you must obtain the account number and institution where the account is held from your employee so you can send in their contribution.
2. Notify employees of employer contributions and contribute to the account(s)
- The deadline to contribute to the participants' accounts is your business' tax filing deadline plus extensions.
- Contributions must be made by the employer and can vary each year between 0% and 25% of compensation (maximum $61,000 for 2022 and $66,000 for 2023). Each eligible employee must receive the same percentage.
- If your business is unincorporated and you need help calculating you may use this worksheet SEP IRA Contribution Worksheet (PDF) .
- If you choose to contribute from your personal account, you may set up electronic funding online or use our app for a mobile deposit. This may not be appropriate for a company contribute, please see your tax advisor with questions.
3. Abide by the terms of the 5305-SEP
Note: It's important to read the 5305-SEP; this is the IRS document that contains the rules for your plan. While there's typically no special tax filing for the SEP IRA, the 5305-SEP states that there are certain steps the employer must take to qualify for relief from the annual 5500 filing. The 5305-SEP covers what you need to know about your eligibility to offer this plan, the eligibility of employees, contribution limits, and more.
4. Update your plan document
If you change your plan from year-to-year, you'll need to fill out a new 5305-SEP form and retain it in your files along with all previous versions. If you are audited the IRS may ask you for your plan document.
5. Correct errors of operation
- If an error is made operating your plan, it's your responsibility as the employer to make necessary corrections.
- One of the most common errors is over contributing to an employee's SEP IRA. A good practice is to double check all contributions before making them. Over contributing can be hard to correct, costly and difficult to properly report to the IRS. If you find that you've over contributed and need to remove funds from the account(s), please fill out the SEP IRA Return of Excess Contribution Request form (PDF) and return it to Fidelity for processing. Note: Funds must be in cash to be distributed.
Fidelity's responsibility
1. Maintain accounts
Fidelity will provide individual brokerage SEP IRA accounts for your eligible employees on our platform as well as the Custodial Agreement and other terms that outlines the rules and agreement for the plan.
2. Prepare tax forms for employees
- IRS tax form 5498 each year there is activity in the account (including contributions). Note: Per IRS rules, we don't report what year your contribution is for, only the year the contribution is received. For example: in February of 2023, a contribution may be made for the tax year 2022. This contribution will appear on the 2023 5498 that will be available early in 2024. See the IRS instructions for the 5498 for more information IRS 10990-R and 5498 Instructions.
- IRS tax form 1099 R for the year distributions or rollovers are processed out of a SEP IRA account.
3. Offer planning and investment guidance to your eligible employees.
- Choose your investments using our exceptional online tools and data. Our experienced representatives can also help you make an informed decision.
- For more information on how we can help you with investment management, planning and advice, please see What We Offer.
Helpful resources:
1. SEP IRA Return of Excess Contribution Request (PDF) 2. IRS 10990-R and 5498 Instructions (PDF) 3. What We Offer 4. IRS SEP IRA 5. IRS SEP IRA fix-it guide 6. Employee Plans Compliance Resolution System (EPCRS) 7. IRS SEP IRA FAQs 8. Retirement plans for small business (PDF)
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No account fees or minimums to open Fidelity retail IRA accounts. Expenses charged by investments (e.g., funds, managed accounts, and certain HSAs), and commissions, interest charges, and other expenses for transactions, may still apply. See Fidelity.com/commissions for further details.
The change in the RMDs age requirement from 72 to 73 applies only to individuals who turn 72 on or after January 1, 2023. After you reach age 73, the IRS generally requires you to withdraw an RMD annually from your tax-advantaged retirement accounts (excluding Roth IRAs, and Roth accounts in employer retirement plan accounts starting in 2024). Please speak with your tax advisor regarding the impact of this change on future RMDs.
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Contribution methods depend on the business structure, and include:
- By check, mailed or deposited at an investor center. View/download deposit slip (PDF) . If funding multiple accounts with one check, please include a spreadsheet with the instructions to split between accounts
- By wire Log In Required
See all SEP IRA FAQs
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SECURE 2.0 Act of 2022 was enacted on 12/23/2022 and could have significant impacts on how you save for retirement. For more information, view the Washington Update .
A SEP-IRA is one of the easiest small business retirement plans to set up and maintain. You can make sizable contributions for yourself and any eligible employees. There's little administration, and tax filing isn't required. And you can vary contributions from year to year—or even skip a year.
What are the fees and commissions?
- $0 account open or maintenance fees. Other account fees, fund expenses, and brokerage commissions may apply 1 .
- Account minimum: $0
- Commissions: $0 per online listed equity trades; 2 $0 per Schwab ETF online trade in your Schwab account 3
There are no fees to open or maintain your account. Other fees may apply; please see Account Pricing.
What do I get with this SEP-IRA?
Every Schwab account comes with one-on-one investment help and guidance. With this account, you'll also get:
- Tax-deductible contributions that vest immediately
- Tax-deferred earnings
- Flexible annual contributions
- High contributions for you
- A way to contribute to qualified employees' accounts
- Retirement planning tools and resources
- 24/7 service and support
How do I contribute?
Once you have established your Schwab SEP-IRA plan, you may begin making contributions.
- If you do not have employees, you can contribute to your account online by transferring funds from your Schwab brokerage account into your SEP-IRA (login required).
- If you do have employees, you must contribute by mail. Contributions for employees cannot be made online.
See below for more information .
To learn more about SEP, view here.
Account Pricing
There is no fee to open or maintain an account at Schwab. Our SEP-IRA offers:
- Minimum opening deposit: $0
- Trade commissions: $0 per online listed equity trades; 2 $0 per Schwab ETF online trade in your Schwab account 3
Find out more about our fees and minimums .
Related Questions
Have questions about our SEP-IRA? Here are responses to some of the most common questions we hear. If you have a specific question that's not answered here, please call us at 800-435-4000 .
To get detailed instructions see Establish Your Plan, or call us at 800-435-4000 if you have questions.
A Simplified Employee Pension Plan (SEP-IRA) is specifically designed for self-employed individuals and small business owners who want to save for retirement without getting involved in complex plan administration. If you are self-employed or have few employees, and if you want flexibility in the amount you contribute annually—particularly if you want to make high contributions—a SEP-IRA might be right for you.
Almost any type of business is eligible to establish a SEP-IRA, from self-employed individuals to multi-person corporations (including sole proprietors, partnerships, S and C corporations, and limited liability companies [LLCs]), tax-exempt organizations, and government agencies.
Employer contributions are tax-deductible. Earnings grow tax-deferred and are not taxed until they are withdrawn.
A SEP-IRA is funded with employer contributions only. It does not need to be funded annually, but if you have employees and contribute for yourself, you must contribute for all eligible employees, including those who have terminated employment during the year. Full vesting is immediate.
You may contribute up to 25% of compensation (20% if you're self-employed 4 ) or $61,000 for tax year 2022 or $66,000 for tax year 2023, whichever is less.
A SEP-IRA can be opened and contributions made until the employer's actual tax-filing deadline, including any extensions.
Plans must be established by the tax-filing deadline of the business (generally April 15, plus extensions) in order to contribute for that tax year. This is also the deadline for annual contributions.
SEP-IRAs are easy to set up and maintain, and no tax filing is required. Schwab reports all contributions and end-of-year fair market value on Form 5498 by May 31 each year.
You can start making penalty-free withdrawals from your account after age 59½. If you do not start Required Minimum Distribution (RMD) withdrawals by age 73, you may be subject to pay a penalty. The new SECURE 2.0 reduces the 50% penalty for missing an RMD effective for RMDs in 2023, it does not impact missed RMDs in 2022. Under SECURE 2.0 if you don't take your RMD by the IRS deadline, a 25% excise tax on insufficient or late RMD withdrawals applies. If the RMD is corrected timely, the penalty can be reduced down to 10%. Follow the IRS guidelines and consult your tax advisor. There are certain exceptions for which you can withdraw funds before age 59½ without taking a 10% penalty, including a rollover to another IRA, some higher education expenses, qualified first-time home purchase expenses, death, disability, and certain medical expenses.
SEP-IRA plans (Simplified Employee Pension) are designed to allow small-business owners or the self-employed to make sizable contributions to a retirement plan without filing a tax form. SEP-IRAs require little administration. Employees can contribute up to 25% of your annual income. If you're self-employed, you can contribute 20% (after subtracting the self-employment tax deduction of your businesses' net profit or equivalent to the employee percentage given). You can decide what amount to contribute each year, from $0 to the maximum SEP-IRA contribution, 25% of compensation (20% if you're self-employed4) or $61,000 for tax year 2022 or $66,000 for tax year 2023, whichever is less. Rollover or transfer rules for a SEP-IRA are the same as traditional IRA plans. That means you can roll over funds to any qualified retirement plan, such as a 401(k). Distributions or withdrawals from a SEP-IRA are penalty-free after age 59½. If you do not start Required Minimum Distributions (RMDs) by age 73, you may be subject to pay a penalty. The new SECURE 2.0 reduces the 50% penalty for missing an RMD effective for RMDs in 2023, it does not impact missed RMDs in 2022. Under SECURE 2.0 if you don't take your RMD by the IRS deadline, a 25% excise tax on insufficient or late RMD withdrawals applies. If the RMD is corrected timely, the penalty can be reduced down to 10%. Follow the IRS guidelines and consult your tax advisor. There are certain exceptions for which you can withdraw funds before age 59½ without taking a 10% penalty, including a rollover to another IRA, some higher-education expenses, qualified first-time home purchase expenses, death, disability, and certain medical expenses.
Establish Your Plan
Follow these instructions for establishing and contributing to a SEP-IRA plan. Need help? Call us at 800-435-4000 .
- Review the basic plan document , which describes and governs your account, and keep it for your records.
- Print and complete the adoption agreement . Retain a copy and return the signed original to Schwab.
- Print and complete your account application . Retain a copy and return the signed original to Schwab.
- Print and complete your employer's agreement . Retain a copy and return the signed original to Schwab.
- Read answers to frequently asked questions about the Schwab SEP-IRA.
- Optional: Review the benefits, features, and contribution eligibility of the plan.
- If you are a single owner sole proprietor, you can setup a SEP plan and open a SEP IRA online . You will be required to upload a signed Employer’s Agreement and Adoption Agreement during account open. Not a single owner sole proprietor? You can still open the account by paper application.
What comes next?
After you've done your initial paperwork, here are the next steps.
Download, print, and distribute the following documents to each eligible employee.
Once you have established your Schwab SEP-IRA plan, opened your own SEP-IRA, and opened SEP-IRAs for eligible employees (as applicable), you may begin making contributions.
- Online: If you do not have employees, you can contribute to your account online by transferring funds from your Schwab brokerage account into your SEP-IRA (login required). Contributions for employees cannot be made online.
- Each participant's account number (including your own)
- The exact amount to be deposited per account
- The plan year for which you are contributing
Be sure your check total matches the total amount of participant contributions. Mail your check and the letter to the nearest Schwab operations center listed below:
Charles Schwab & Co., Inc. P.O. Box 628291 Orlando, FL 32862-8291
Charles Schwab & Co., Inc. P.O. Box 982600 El Paso, TX 79998-2600
Take the next step.
Ready to establish a SEP-IRA plan? Get detailed instructions above in Establish Your Plan.
Or call 800-435-4000 .
See all Schwab accounts .
Ready to get started?
If you are a single owner sole proprietor, you can setup a SEP plan and open a SEP IRA online. You will be required to upload a signed Employer's Agreement and Adoption Agreement during account open. Not a single owner sole proprietor? Review the Establish Your Plan section above and follow the directions to open the account by paper application.
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SEP Plan FAQs
More in retirement plans.
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A Simplified Employee Pension (SEP) plan provides business owners with a simplified method to contribute toward their employees' retirement as well as their own retirement savings. Contributions are made to an Individual Retirement Account or Annuity (IRA) set up for each plan participant (a SEP-IRA).
A SEP-IRA account is a traditional IRA and follows the same investment, distribution, and rollover rules as traditional IRAs. See the IRA FAQs .
See also Publication 560 PDF , Publication 590-A and Publication 590-B for detailed information on SEP plans and SEP-IRAs.
Establishing a SEP
Participation, compensation, contributions.
- Distributions (Withdrawals) (same as IRA rules - see IRA FAQs )
- Investments (same as IRA rules - see IRA FAQs )
Reporting Requirements
- Terminating a SEP
Who can establish a SEP?
Any employer, including self-employed individuals, can establish a SEP.
How do I establish a SEP?
There are three basic steps in setting up a SEP, all of which must be satisfied.
- IRS model SEP using Form 5305-SEP, Simplified Employee Pension - Individual Retirement Accounts Contribution Agreement PDF ;
- IRS-approved prototype SEP, offered by banks, insurance companies, and other qualified financial institutions; or
- individually designed SEP plan document.
- Provide each eligible employee with information about the SEP. If you established the SEP using the Form 5305-SEP, the information must include a copy of the Form 5305-SEP, its instructions and the other information listed in the Form 5305-SEP instructions. If you used a prototype SEP or individually designed SEP, you must provide similar information.
- Set up a SEP-IRA for each eligible employee with a bank, insurance company or other qualified financial institution. The employee owns and controls the SEP-IRA.
Is there a deadline to set up a SEP?
You can set up a SEP plan for a year as late as the due date (including extensions) of your business's income tax return for that year.
If I have a SEP, can I also have other retirement plans?
You can maintain both a SEP and another plan. However, unless the other plan is also a SEP, you cannot use Form 5305-SEP; you must adopt either a prototype SEP or an individually designed SEP.
Can I set up a SEP for my self-employment income if I participate in my employer's retirement plan?
Yes, you can set up a SEP for your self-employed business even if you participate in your employer's retirement plan at a second job.
Can each partner in a partnership maintain a separate SEP plan?
No, only an employer can maintain and contribute to a SEP plan for its employees. For retirement plan purposes, each partner or member of an LLC taxed as a partnership is an employee of the partnership.
Do I need to update my SEP plan?
It is your responsibility to ensure that you keep your plan up-to-date with current law. If you set up your plan with a prototype plan document, you should have received an amended plan from the financial institution that provided it. If you didn't receive a new plan document, contact the financial institution. If you set up your plan with Form 5305-SEP, adopt a new form when the IRS updates it. See the instructions to Form 5305-SEP PDF .
Can each of my employees choose a different financial institution for his or her SEP-IRA?
Although the law does not require each participant's SEP-IRA to be at the same financial institution, the institution that offers or administers the SEP may require you to deposit SEP contributions initially into SEP-IRAs maintained at that institution.
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Which employees are eligible to participate in my SEP plan?
Employees must be included in the SEP plan if they have:
- attained age 21;
- worked for your business in at least 3 of the last 5 years;
- received at least $750 in 2022; $650 in 2021 and 2022; $600 in compensation (in 2016 - 2020) from your business for the year.
Your plan may use less restrictive requirements, for example age 18 or three months of service, to determine which employees are eligible.
Are the eligibility requirements the same for all employees in a SEP plan, including owners?
Yes. The eligibility provisions stated in the SEP plan document must apply equally to owners and employees.
My spouse and I own our business. Must we both meet the SEP plan eligibility requirements to receive a plan contribution?
Yes. Each of you must separately meet the plan eligibility requirements to participate.
I'd like to establish a SEP plan that allows me to participate immediately. Can I establish different SEP plan eligibility requirements for future employees?
Yes. You can initially establish your SEP plan so that you are immediately eligible to participate in the plan. Later, you can amend the plan to have more restrictive eligibility requirements, but you must also meet the new eligibility requirements to continue your participation in the plan.
What is the 3-of-5 rule?
The 3-of-5 eligibility rule means you must include any employee in your plan who has worked for you in any 3 of the last 5 years (as long as the employee has satisfied the other plan eligibility requirements). This is the most restrictive eligibility requirement allowable. You can choose to use less restrictive participation rules in your plan, such as allowing employees to participate immediately after they start work or after a shorter period of employment (for example, after working for only 1 year).
If you use the 3-of-5 rule, you must count any work, no matter how little, in each of the prior 5 years. Use plan years (often the calendar year), not years based on the date the employee started working for you.
Example : Your SEP plan uses the 3-of-5 eligibility rule, uses a calendar year and has no age or compensation requirements. To be eligible for a contribution for 2019, an employee must have worked for you for any length of time in any 3 years in the 5-year period from 2014 to 2018. An employee who worked for you for two months in 2014, 2016 and 2018 must share in the SEP contribution made for 2019.
If you didn't include an employee who worked for you in 3 out of the last 5 years, or if you didn't follow your SEP plan's participation requirements, find out how you can correct this mistake.
Is my new employee eligible to participate in our SEP plan immediately?
It depends on your SEP plan's eligibility requirements. Review your plan document to determine the plan's eligibility requirements.
If our SEP plan document includes the 3-of-5 eligibility rule, do we have to make a 2019 SEP plan contribution for an employee who was hired in December 2016?
Yes, if the employee meets all the other eligibility requirements of your plan, a SEP contribution is required for 2019 for any employee who worked for you for any length of time in 2016, 2017 and 2018.
Years are counted based on the plan year (usually the calendar year), not from the date the employee started working for you.
If our SEP plan's only eligibility requirement is age 21, can we prorate an employee's compensation from the date he turns 21 for his SEP contribution for that year?
No. You must base the employee's SEP plan contribution on the employee's entire plan-year compensation.
Our SEP plan requires employees to earn at least $650 in compensation for the year to participate in the plan. Can we prorate an employee's compensation from the date he earns more than $650 in the year for that year's SEP contribution?
No. Once the employee earns at least $650 in 2021 or in 2022 ($600 in 2020 and 2019) in a year and meets any other plan eligibility requirements, you must base the employee's SEP plan contribution on the employee's entire plan-year compensation.
Which categories of employees may I exclude from my SEP plan?
You may choose to exclude employees who are:
- covered by a union agreement if retirement benefits were bargained for in good faith by you and the employees' union; or
- nonresident aliens who have no U.S. source compensation.
As discussed above, you may also choose to exclude employees who have not met the minimum requirements for age, time of service, or compensation received.
If you excluded employees who should have been included in your SEP plan, find out how you can correct this mistake.
What happens if an employee elects not to participate?
An employer may establish a SEP-IRA for an employee who is entitled to a contribution under the SEP plan if the employee is unable or unwilling to establish a SEP-IRA.
What compensation is included in determining SEP contributions for an employee?
For an individual who is not self-employed, compensation used to determine SEP contributions generally includes: wages, salaries, tips, overtime, bonuses, commissions, vacation and sick pay, fees, and other remuneration from the employer for services performed.
Compensation does not include severance pay, nontaxable fringe benefits, or worker’s compensation.
Compensation is limited to $330,000 in 2023, $305,000 in 2022, $290,000 in 2021 and $285,000 in 2020.
Refer to your written SEP agreement for more information.
What compensation is included in determining SEP contributions for a self-employed individual?
For purposes of the SEP plan rules, a self-employed individual's compensation means net earnings from self-employment determined under Internal Revenue Code section 1402(a).
How much can I contribute to my SEP?
The contributions you make to each employee's SEP-IRA each year cannot exceed the lesser of:
- 25% of compensation, or
- $66,000 for 2023 ($61,000 for 2022; $58,000 for 2021; $57,000 for 2020 and subject to annual cost-of-living adjustments for later years).
These limits apply to contributions you make for your employees to all defined contribution plans, which includes SEPs. Compensation up to $330,000 in 2023 ($305,000 in 2022; $290,000 in 2021; $285,000 in 2020 and subject to cost-of-living adjustments for later years) of an employee's compensation may be considered. If you're self-employed, use a special calculation to determine contributions for yourself .
Contributions must be made in cash; you cannot contribute property.
If you've contributed more than the annual limits to your SEP plan, find out how to correct this mistake.
How much can I contribute if I'm self-employed?
The same limits on contributions made to employees' SEP-IRAs also apply to contributions if you are self-employed. However, special rules apply when figuring the maximum deductible contribution. See Publication 560 for details on determining the contribution amount.
Must I contribute the same percentage of salary for all participants?
Most SEPs, including the IRS model Form 5305-SEP, require you to make allocations proportional to your employees' salary/wages. This means that everyone's contribution is the same percentage of salary.
If you haven't made contributions to participants' SEP-IRAs equal to the same percentage of each participant's compensation, find out how you can correct this mistake.
If you are self-employed, base your contribution on net profit - minus one-half of the self-employment tax - minus your SEP contribution. See IRS Publication 560 on determining the contribution amount.
If I participate in a SEP plan, can I also make tax-deductible traditional IRA contributions to my SEP-IRA?
If the SEP-IRA permits non-SEP contributions, you can make regular IRA contributions (including IRA catch-up contributions if you are age 50 and older) to your SEP-IRA, up to the maximum annual limit . However, the amount of the regular IRA contribution that you can deduct on your income tax return may be reduced or eliminated due to your participation in the SEP plan.
If I participate in a SEP plan, can I contribute to a Roth IRA in addition to receiving contributions under the SEP plan?
A SEP-IRA is a traditional IRA that holds contributions made by an employer under a SEP plan. You can both receive employer contributions to a SEP-IRA and make regular, annual contributions to a traditional or Roth IRA. Employer contributions made under a SEP plan do not affect the amount you can contribute to an IRA on your own behalf.
Because a SEP-IRA is a traditional IRA, you may be able to make regular, annual IRA contributions to this IRA, rather than opening a separate IRA account. However, any dollars you contribute to the SEP-IRA will reduce the amount you can contribute to other IRAs, including Roth IRAs, for the year.
Example 1: Nancy's employer, JJ Handyman, contributes $5,000 to Nancy's SEP-IRA at ABC Investment Co. based on the terms of the JJ Handyman SEP plan. Nancy, age 45, is permitted to make traditional IRA contributions to her SEP-IRA account at ABC Investment Co., and she contributes $3,000 in 2019. If Nancy also wants to contribute to her Roth IRA at XYZ Investment Co. for 2019, she can contribute $3,000 ($6,000 maximum contribution less the $3,000 already contributed to her SEP-IRA) by April 15, 2020.
Example 2: Nancy, age 45, is the owner and sole employee of JJ Investment Advisors. Nancy contributes the maximum allowable amount to her SEP-IRA for 2019, or $56,000. Nancy may also make regular, annual IRA contributions to her SEP-IRA, if her SEP-IRA allows this, or contribute to her Roth IRA at XYZ Investment Co. Her total traditional IRA and Roth IRA contributions cannot exceed $6,000 for 2019 and may be made in addition to her SEP contributions.
Can I make catch-up contributions to my SEP?
No, SEPs are funded by employer contributions only. Catch-up contributions apply only to employee elective deferrals. However, if you are permitted to make traditional IRA contributions to your SEP-IRA account, you may be able to make catch-up IRA contributions .
Must I contribute to the SEP every year?
No, you are not required to contribute every year. In years you do contribute to the SEP, the contributions must be made to the SEP-IRAs of all eligible employees.
Do I have to contribute for a participant who is no longer employed on the last day of the year?
Yes, you do, if they are otherwise eligible for a contribution. A SEP cannot have a last-day-of-the-year employment requirement. If the employee is otherwise eligible, they must share in any SEP contribution. This includes eligible employees who die or quit working before the contribution is made. If you haven't made a contribution for an eligible employee in your SEP plan, find out how you can correct this mistake.
Can I contribute to the SEP-IRA of a participant over age 70 ½?
You must contribute for each employee eligible to participate in your SEP, even if they are over age 70 ½. The employee must also take minimum distributions, however. If you haven't contributed for an eligible employee in your SEP plan, find out how you can correct this mistake.
When must I deposit the contributions into the SEP-IRAs?
You must deposit contributions for a year by the due date (including extensions) for filing your federal income tax return for the year. If you obtain an extension for filing your tax return, you have until the end of that extension period to deposit the contribution, regardless of when you actually file the return.
If you did not request an extension to file your tax return and did not deposit the SEP plan contributions by the filing due date for that return, you are not allowed to deduct any SEP plan contributions on that year's return. The contributions may be deducted on the following year's return.
If you improperly deducted SEP plan contributions on your return, you must file an amended tax return as soon as possible.
How much of the SEP contributions are deductible?
The most you can deduct on your business's tax return for contributions to your employees' SEP-IRAs is the lesser of your contributions or 25% of compensation. (Compensation considered for each employee is limited and subject to annual cost-of-living adjustments ). If you are self-employed and contribute to your own SEP-IRA, there is a special computation to figure the maximum deduction .
Are employer contributions taxable to employees?
No, contributions to employees' SEP-IRAs are not included in their gross income, unless they are excess contributions.
What are the consequences to employees if I make excess contributions?
Excess contributions are included in employees' gross income. Employees who withdraw the excess contribution (plus earnings) before the due date for their federal return, including extensions, will avoid the 6% excise tax imposed on excess SEP contributions in an IRA. Excess contributions left in the employee's SEP-IRA after that time will be subject to the 6% tax on the employees' IRAs, and the employer may be subject to a 10% excise tax on the excess nondeductible contributions. If you've contributed too much to your employees' SEP-IRA, find out how you can correct this mistake.
If my SEP plan fails to meet the SEP requirements, are the tax benefits for me and my employees lost?
Generally, tax benefits are lost if the SEP fails to satisfy the Internal Revenue Code requirements. However, you can retain the tax benefits if you use one of the IRS correction programs to correct the failure. In general, your correction should put employees in the position they would have been had the failure not occurred.
Why is last year's contribution that was made this year for the SEP-IRA shown on this year's Form 5498 instead of last year's Form 5498?
The IRS requires contributions to a SEP-IRA to be reported on the Form 5498 for the year they are actually deposited to the account, regardless of the year for which they are made.
Terminating a SEP Plan
Do i need to amend my sep for the new law before i terminate it.
Generally, the IRS has not required employers to amend their SEPs for new law prior to termination. Check with your plan professional.
Do I have to fund my SEP in the year of termination?
SEPs can be terminated at any time. You can stop funding your plan once it is terminated.
What are the notification requirements when a SEP terminates?
When you terminate your SEP plan, it is a good idea to notify the employees that you are discontinuing the plan. You may need to notify the financial institution that you chose to handle the plan that there will be no more contributions and that you will terminate the contract or agreement with it. Do not notify the IRS of the plan's termination.
If I go out of business or my employee terminates service, can the amount in a SEP-IRA be left untouched?
Have a question about retirement plans? Contact us .
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Prepare for retirement with a flexible, easy-to-manage plan
A simplified employee pension plan (sep) ira is a flexible retirement plan offering tax benefits to business owners and their employees as well as self-employed people. footnotes 1, 2, sep ira features, bring value to your business without the extra fees.
Which retirement account is right for your business?
What's a key difference between a sep ira and a simple ira, get started with a sep ira in 3 easy steps, decide how you want to invest, open your account, explore all plans available for small business, ready to get started, frequently asked questions, why should i consider opening a sep ira instead of a traditional ira, what are the contribution limits for a sep ira, who can contribute to the account, can i roll over funds from a retirement account with a previous employer, how much does it cost for me and my employees to set up sep ira accounts, can funds be withdrawn from a sep ira before age 59½, when are contributions fully vested, what investment choices are available, what if i prefer to invest with an advisor, what are the advantages for employees, what is the plan establishment deadline, is irs reporting required.
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What Is a Simplified Employee Pension Plan? How SEP IRAs Work
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What is a SEP IRA?
A SEP IRA reads like a mess of letters, and spelling it out doesn’t necessarily help: The first part stands for simplified employee pension; the second for individual retirement account.
Translation: A SEP IRA is a basic individual retirement account, much like a traditional IRA . SEP IRAs are for business owners, and contributions are tax-deductible. Investments grow tax-deferred until retirement, when distributions are taxed as income.
SEP IRA contribution limits
A traditional IRA allows you to put away up to $6,000 in 2022, and $6,500 in 2023. For those 50 and older, you can contribute an additional $1,000 both years. With a SEP IRA, you can stockpile nearly 10 times that amount, or up to $61,000 in 2022, and $66,000 in 2023. However, SEP IRA annual contribution limits cannot exceed the lesser of:
25% of compensation.
$61,000 in 2022 and $66,000 in 2023.
The first limit, 25% of compensation, is also the limit for how much you can contribute for each eligible employee. The amount of compensation you can use to calculate the 25% limit is limited to $305,000 in 2022 and $330,000 in 2023.
There's no catch-up contribution at age 50 and older for SEP IRAs.
SEP IRA rules: Who is eligible?
Generally, SEP IRAs are best for self-employed people or small-business owners with few or no employees. Here's why: If you have employees whom the IRS considers eligible participants in your plan , you must contribute on their behalf, and those contributions must be an equal percentage of compensation to your own .
Eligible participants are employees who are 21 or older, have worked for you for at least three of the past five years, and have made a minimum of $650 in 2022 or $750 in 2023. For example, if an employee worked for you in 2019, 2020 and 2021 and made $850, you would need to make a contribution for them for the 2023 plan year.
If you want to stash away 15% of your compensation for yourself, you must also contribute 15% of that employee's compensation to their plan. Note that this is just an example — SEP IRAs are subject to contribution limits listed above.
Employees own and control their own accounts.
Because of that rule requiring equal contributions as a percentage of compensation, a SEP IRA is generally best for self-employed people or small-business owners with few or no employees.
» Are you on track for retirement? Check our retirement calculator to find out
How does a SEP IRA work? The pros and cons
How do i open a sep ira.
It's easy to open a SEP IRA account online. The first step is to choose an account provider. Here are our top picks for best IRA account providers .
Then, the IRS outlines three steps for setting up your SEP IRA:
Create a formal written agreement. You can do this with IRS Form 5305-SEP or through your account provider.
Give eligible employees information about the SEP IRA. You can give them a copy of IRS Form 5305-SEP or get similar information through your account provider.
Set up separate SEP IRAs for each eligible employee with the account provider.
How do I invest my SEP IRA?
Once you’ve opened the account, you can choose from the investments your account provider offers. The selection typically includes stocks, bonds and mutual funds. (It's possible to open an IRA at a bank, but generally you'll be limited to investing in certificates of deposit, which usually offer a lower return than a diversified group of stocks and bonds.)
» Want more IRA investing lessons? Read our post on how to invest your IRA .
Once the account is open and funded, you’ll want to invest it according to your age, planned retirement age, and risk tolerance. If you have a fairly strong stomach for market swings and a long time until retirement, consider swaying your investment selection toward stocks, specifically stock index funds, which track a segment of the market and hold a diverse mix of stocks within that segment.
The less time you have until retirement — and the less patience you have for a market downturn — the more you might want to allocate toward bonds and bond funds. You can also buy index funds for bonds.
» Thinking about the future of your business? Learn about succession planning .
SEP IRA vs. Roth IRA
Both a SEP IRA and Roth IRA offer tax benefits when you retire. The main difference between a SEP and Roth IRA is that SEP IRAs offer tax-deferred growth on your investments, while Roth IRAs give you tax-free growth and withdrawals in retirement.
Contributions to SEP IRAs are tax deductible. You can't deduct contributions from a Roth, because you already paid taxes on the money before adding it to your account. Another major difference between a SEP and Roth account is that you can include employees in a SEP IRA and make contributions for them. You can't do that with Roths, and they may be better for self-employed individuals for that reason.
SEP IRAs also have higher contribution limits (up to $61,000 in 2022 and $66,000 in 2023) than Roth IRAs ($6,000 in 2022 and $6,500 in 2023). The bottom line is, both accounts can be suitable for business owners. It's just that they have different types of tax advantages, and SEP IRAs may be more suitable for companies with multiple employees.
SIMPLE IRA vs. SEP IRA
A SIMPLE IRA or Savings Incentive Match Plan for Employees is a retirement savings plan for employers and self-employed people. Some of the eligibility requirements include having no more than 100 employees who earned at least $5,000 in the previous year. The main difference between a SIMPLE IRA and a SEP IRA is that only employers are allowed to contribute to SEP IRAs, but employees can contribute to SIMPLE IRAs through their paycheck via elective deferrals.
Another core difference is that the SIMPLE IRA employee contribution limit is $14,000 in 2022, with a $3,000, catch-up contribution. In 2023, those numbers are $15,500, with a $3,500 catch-up for those 50 and older. The SEP IRA contribution limit is up to $61,000 for 2022 and $66,000 in 2023.
» Read more about SIMPLE IRAs
Once you’ve opened the account, you can choose from the investments your account provider offers. The selection typically includes stocks, bonds and mutual funds. (It's possible to open an IRA at a bank, but generally you'll be limited to investing in Certificates of Deposit, which usually offer a lower return than a diversified group of stocks and bonds.)
» Want more investing guidance? Read our post on how to invest your IRA .
Once the account is open and funded, you’ll want to invest it according to your age, planned retirement age and risk tolerance. If you have a fairly strong stomach for market swings and a long time until retirement, your investment selection should sway toward stocks, specifically stock index funds, which track a segment of the market and hold a diverse mix of stocks within that segment.
The less time you have until retirement — and the less patience you have for a market downturn — the more you’ll want to allocate toward bonds and bond funds. You can also buy index funds for bonds.
You can combine a SEP IRA with a traditional or Roth IRA . If you’re an employee who is covered by a SEP IRA, employer contributions don’t reduce the amount you can contribute to an IRA for yourself, but the amount of your traditional IRA contribution that you can deduct may be reduced at certain higher income levels, due to the combination of both plans. (For more on that, see our post on IRA contribution limits .)
The government places no restrictions on contributing to both a SEP IRA and a traditional IRA in the same year. Also note you do not need to reduce your SEP IRA contribution to also contribute to a traditional IRA.
However, there are income limits to deducting contributions to a traditional IRA. Those with workplace retirement plans can only take the full deduction on a traditional IRA if their income is less than $68,000 in 2022 and $73,000 in 2023.
If you exceed the income limits and aren't eligible for a traditional IRA deduction, you could roll the funds from your traditional IRA into a Roth IRA using the backdoor Roth method. You can read our backdoor Roth article to learn more about how this works. By rolling over your funds into a Roth, you can enjoy tax-free distributions assuming you wait until your full retirement age.
The catch is that the government requires all rollovers from traditional to Roth IRAs be done on a pro-rata basis. This means that if you have an account with a $56,000 SEP IRA contribution and a $6,000 nondeductible traditional IRA contribution, you cannot choose to just rollover the $6,000. If you rolled over $6,000 (9.7% of all of the $62,000 total), the government would treat that like you were rolling over $5,418 (or 9.7%) of the SEP and $582 (also 9.7%) of the non-deductible traditional IRA, which is not what you intended at all. Unfortunately, you don’t have the option of designating which dollars are getting rolled over.
The only way to rollover the full non-deductible amount into a Roth IRA would be to rollover all of your traditional assets (this includes the full value of your SEP IRA and other traditional IRA accounts)
» Want more investing guidance? Read our post on
how to invest your IRA
» Thinking about the future of your business? Learn about
succession planning
You can combine a SEP IRA with a traditional or
. If you’re an employee who is covered by a SEP IRA, employer contributions don’t reduce the amount you can contribute to an IRA for yourself, but the amount of your traditional IRA contribution that you can deduct may be reduced at certain higher income levels, due to the combination of both plans. (For more on that, see our post on
IRA contribution limits
If you exceed the income limits and aren't eligible for a traditional IRA deduction, you could roll the funds from your traditional IRA into a Roth IRA using the backdoor Roth method. You can read our
backdoor Roth
article to learn more about how this works. By rolling over your funds into a Roth, you can enjoy tax-free distributions assuming you wait until your full retirement age.
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SIMPLE PLAN: Employee Retirement For Small Businesses
What is a simple plan.
A SIMPLE plan is a retirement plan that companies can offer to employees, given they have no more than 100 employees. SIMPLE means Savings Incentive Match Plan for Employees of small employers. In insurance, insurance companies often serve as trustees who manage SIMPLE plans on behalf of the employer.
Who Can Start a SIMPLE Plan?
SIMPLE planning can be achieved by employers of not more than 100 employees who earned $5,000 or more in the preceding calendar year. But despite meeting this requirement, if an employer is already sponsoring another retirement plan, they cannot engage in SIMPLE planning.
SIMPLE plans can be sponsored by various business types and organizations, including S-corporations, C-corporations, sole proprietorships, and partnerships. Related employers (businesses under common control, for instance) are categorized and treated as single employers. Even a tax-exempt employer or governmental entity may start a SIMPLE plan insomuch as they meet the basic requirements.
Pros and Cons of SIMPLE Planning
SIMPLE plans are no doubt necessary, with marked advantages and disadvantages. Here are a few advantages and limitations of SIMPLE plans.
Pros of SIMPLE Plans:
Minimal paperwork to set up
There are instances where you can set up a plan online, depending on the provider, and the paperwork associated with SIMPLE planning is essentially less than what you’d be required to fill out for other types of accounts, like a 401(k) plan.
Low start-up and maintenance costs
There are retirement plans that demand costly fees to open and maintain the accounts. With SIMPLE plans, your business typically is demanded lower upfront and managing costs .
Money put into the plan is tax-deductible
It is possible to deduct contributions on tax returns when using SIMPLE plans.
No IRS filing requirements
Your plan provider handles reporting requirements to the IRS.
Cons of SIMPLE Plans
Employer-matching requirement
SIMPLE planning requires businesses to match employee contributions exactly, up to a certain percentage.
Lower contribution limit
The contribution limits placed on SIMPLE plans are lower than those on other retirement accounts. For example, as of 2020, 401(k) plans have a contribution limit of $19,500 and $6,500 for catch-up contributions.
Withdrawing requirements
With SIMPLE plans, you cannot withdraw any money from the account you reach age 59½. If you take money out before then, a 10% penalty and income taxes on your withdrawal will be levied.
No Roth contributions
With SIMPLE plans, there’s no option to have a Roth version of your SIMPLE IRA. So, you can’t fund your account with post-tax money and successfully evade taxes on the money when you withdraw it.
SIMPLE Plans Contributions
SIMPLE planning makes it possible for small businesses to join millions of other employers who have established retirement plans. They also allow some flexibility in the type of contributions employers provide to employees.
Employees contribute to SIMPLE plans by establishing and consenting to a salary reduction from each paycheck, as much as $6,000 a calendar year. Contributing employees receive a matching contribution that is equal to their salary reduction contribution (i.e., up to 3 percent of their pay).
Alternatively, employers may institute a “non-elective” or fixed contribution of 2 percent of pay for eligible employees . It is also acceptable for employers to reduce the matching contribution amount to a limit of one percent of compensation, but certain restrictions will apply to this choice.
Trustees execute SIMPLE plans, and the contributions towards SIMPLE plans are transferable from one SIMPLE plan to another tax-free SIMPLE plan in a trustee-to-trustee transfer. However, to effect such a transfer to tax-free contributions in another type f retirement plan, there is a 2-year waiting period after the employee first enrolls in the SIMPLE plan. Until this 2-year period elapses, any transfer from a SIMPLE IRA to an IRA other than a SIMPLE IRA will incur tax repercussions.
Employee Elections
When it comes to SIMPLE planning, everything is based on a calendar year, except in a situation where an employer initially sets up a SIMPLE plan effective as late as October 1 of the calendar year. At least once a year, employees must be offered the chance to enter into a SIMPLE plan salary reduction agreement. Election periods must last at least 60-days, and employees must receive notice about an upcoming enrolment opportunity before the stipulated period for the election.
Other election features
Election periods should fall annually before January 1 of each calendar year (i.e., November 2 to December 31). Another suitable date range can be chosen given that there is more flexibility with the election period requirement when a SIMPLE plan is initially established.
There is room for employees to make a new salary reduction agreement during the election period or modify a prior agreement. A copy of the SIMPLE plan’s “summary description” must be sent to employees when they receive notice about the election period.
There is also room for employees to elect a termination of their salary reduction contribution towards a SIMPLE plan whenever they so choose. However, suppose employees opt to end their contributions at a time other than a designated election period. In that case, employers may preclude them from participating again until the commencement of the following calendar year. Employees may also be allowed to select the financial establishments they would like to receive their SIMPLE plan contributions during their election periods.
Notification Requirements
Employers should give each year’s notice about the enrolment period, and they should ensure to:
- Include a copy of the summary description of the terms of the SIMPLE plan. They may achieve this by providing a completed copy of IRS Forms 5304-SIMPLE or 5305-SIMPLE, and this includes the procedures set in place by the financial institutions for withdrawals.
- Provide information on the employer’s method in contributing to employees’ SIMPLE plans, for example, whether they would match employee contributions by up to 3% of their pay or by some other authorized method.
- Specify to employees that they can choose their financial institutions to serve as trustees for their SIMPLE plans. If the employer takes the responsibility of deciding the financial institution to receive contributions for all employees under the SIMPLE plan, then be sure to include this information, stipulating that employees have the right to transfer their contributions to a SIMPLE plan at another financial institution, and this should incur them no cost or penalty whatsoever.
There are two additional facets of notification employers should consider:
- Mention that employers may provide extended periods of election time to their employees (for instance, extending the election period to 90 days or providing quarterly or semi-annual election periods).
- Employers should also mention there are substantial penalties for failure to notify employees before an election period.
Trustee Requirements
A critical aspect of SIMPLE planning is choosing a financial institution to maintain employees’ plans. This is, perhaps, one of the most essential decisions employers or employees will make regarding SIMPLE planning. Trustees work closely with employers to receive their contributions, invest those contributions and issue certain required information. Within the confines of SIMPLE planning, some types of institutions can be designated as trustees: banks, savings and loan associations, insurance companies (that issue annuity contracts), insured credit unions, or IRS-approved non-bank trustees.
Trustees must agree to:
- Accept and deposit contributions.
- Detail and make available to the employer a summary description each year that includes:
- the specific name and address of the employer and trustee;
- a detailed description of eligibility requirements;
- a the specific benefits provided;
- a the time and method of making salary elections; the procedure for and effects of withdrawals and rollovers (including the penalties for early withdrawals).
There are three additional trustee requirements:
- the trustee must provide a statement of the account balance and activity of the account for the year within 30 days after the close of each calendar year to the individual.
- The trustee reports SIMPLE plan information to the IRS, the same as with any IRA account.
- A trustee that is a “designated financial institution” by agreement with the employer should also agree to transfer, upon request, an individual’s SIMPLE plan balance to another IRA or SIMPLE plan IRA without cost or penalty to the individual.
How to Start SIMPLE Plans
To start up a SIMPLE plan, here’s a step-by-step approach:
- Choose a financial institution
- Develop a written agreement to provide benefits to all eligible employees
- Give employees specific details about the above agreement
- Set up an IRA account for each employee
Choose a Financial Institution
SIMPLE planning requires choosing a financial institution to serve as trustee of the SIMPLE plan to hold each employee’s/participant’s retirement plan assets. These set-up accounts will receive the contributions you make to the plan. Another route would be to allow employees to choose the financial institutions that will receive their contributions.
Execute a Written Agreement
You can use forms to set up a SIMPLE plan. You can make use of SIMPLE form templates or prototype documents from a mutual fund, insurance company, bank, or other qualified, as well as an individually designed plan. These documents detail the SIMPLE plan and may not be filed with the IRS.
Annual Notice to Eligible Employees
You must notify each employee before the start of an election period of:
- The employee’s right to make or change a salary reduction choice under the SIMPLE plan;
- The employees’ ability to choose any financial institution as a trustee of the employees’ SIMPLE plan;
- The choice to make either matching contributions or non-elective contributions;
- A summary description (usually provided by the financial institution); and
- A written notice that the employee can freely transfer their balance without cost or penalty if they opt for the employer’s default institution.
Set Up a SIMPLE IRA for Eligible Employees
A SIMPLE plan must be set up by or for each eligible employee, and all contributions to the plan must go into the SIMPLE plan.
When to Set Up a SIMPLE Plan
SIMPLE planning can occur at any time from January 1 through October 1 of a year, provided you didn’t previously maintain a plan. But this requirement doesn’t apply in the case where you were stepped in as an employer after October 1, taking over from one who had already instated a SIMPLE plan. In this case, you can freely set up another SIMPLE plan as soon as it’s administratively feasible after your business comes into existence. In the case where you had previously maintained a SIMPLE IRA plan, then you can set up a SIMPLE IRA plan only on January 1 of a year. A SIMPLE plan cannot have an effective date before the date you adopt the plan.
Eligibility to Participate in a SIMPLE Plan
An employee (including a self-employed individual) can participate in a SIMPLE plan if they
- earned at least $5,000 in compensation during any two years before the current calendar year and
- anticipates receiving at least $5,000 during the current calendar year.
When it comes to SIMPLE planning and implementation of requirements, employers can sway towards less restrictive than more restrictive measures. Employers can’t impose conditions for participating in a SIMPLE IRA plan.
However, an employer can exclude the following employees from a SIMPLE IRA plan:
- Those employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees’ union and the employer
- Non-resident alien employees who lack U.S. wages, salaries, or other personal services compensation from the employer.
Operation and Maintenance of a SIMPLE Plan
Having stipulated the persons eligible to create and participate in a SIMPLE plan and the basic steps involved in creating a SIMPLE plan, it is imperative to outline some critical operational questions to answer SIMPLE planning worries.
What are the contribution rules?
SIMPLE plan trustees are responsible for holding the contributions made for each eligible employee. A SIMPLE IRA is funded by:
- Annual employee salary reduction contributions (elective deferrals), which is limited to $13,500
- For employees age 50 or over, a $3,000 “catch-up” contribution is also allowed
Employer contributions
It is up to the employer to choose annually one of the contribution methods listed below and inform employees of the various contribution methods, letting them decide which method they would use for the following year.
- 2% non-elective contribution : In this case, 2% of each eligible employee’s compensation (salary) is deferred, regardless of whether or how much the employee deferred.
- 3% matching contribution: This involves matching the employee’s elective deferrals on a dollar-for-dollar basis up to 3% of the employee’s compensation.
- The employer may reduce the 3% limit to a lower percentage, but such deductions may not go lower than 1%. The figure may not go lower the 3% limit for more than two calendar years out of the five years ending with the calendar year the reduction is effective. The employer isn’t allowed to make any other contributions to a SIMPLE plan.
When deciding employer contributions, you must follow the definition of compensation as stated in the plan document. Compensation generally refers to the pay an individual receives from you for services rendered that year.
Automatic Enrollment: this feature allows an employer to deduct a fixed percentage or amount from an employee’s wages and contribute that to the SIMPLE plan without the express attention of the employee at each deduction unless the employee chooses to contribute nothing or to contribute a different amount. These automatic enrollment contributions qualify to be classified as elective deferrals.
Annual Election Period: Employees can change their contribution levels each year during the plan’s election period. Such election periods must last at least 60 days, and employees must receive prior notice about an upcoming election opportunity.
When employees want to stop contributions
With SIMPLE planning, employees can opt to terminate their salary reduction contributions to a SIMPLE plan at any time. If they choose to do so, the SIMPLE IRA may preclude them from resuming salary reduction contributions until the next calendar year begins. In such cases, the employers must continue to make those non-elective deductions on behalf of these employees.
Where are contributions deposited?
Once you send the plan contributions to the financial institution you selected, that institution takes on the charge of managing the funds. Employees can move their SIMPLE plan assets from one SIMPLE plan trustee to another. SIMPLE plan contributions can be invested in individual stocks, mutual funds, and other similar types of investments. It is up to the employee to make the investment decisions for their account.
S an employer, you’ll need to give each participating employee an annual statement that clearly shows the amount contributed to the employee’s account for that year.
When must contributions be deposited?
Employee salary reduction contributions : These contributions should be effected within 30 days after the end of the month. The amounts would otherwise have been payable to the employee (and self-employed individuals) in cash.
Employer matching or non-elective contributions : These contributions should be made by the due date (including extensions) for filing your federal income tax return for the year
Who owns SIMPLE IRA contributions?
Contributions to SIMPLE planning accounts are always entirely vested or owned by the employee.
What are the basic withdrawal rules?
Contributions and earnings can be withdrawn at any time. A withdrawal is taxable in the year it is received. If a participant in a SIMPLE plan chooses to withdraw before they attain age 59 ½, a 10% additional tax generally applies. If this withdrawal occurs within the first two years of participation, the tax is raised from 10% to 25%.
When a participant withdraws funds from a SIMPLE plan, the IRA may continue participating in the employer’s plan. The result of all contributions and earnings from SIMPLE plans is that they would be distributed in line with SIMPLE plan distribution rules.
SIMPLE plan contributions and earnings may be rolled over from one trustee to another with tax-free repercussions. A tax-free rollover may also be possible for a swap from a SIMPLE plan to a plan that is not a SIMPLE plan, but this can only be possible after at least two years of participation in the SIMPLE plan.
Participant loans
SIMPLE planning does not permit loans. However, SIMPLE plan accounts allow withdrawals as they are IRA accounts.
How to ensure your SIMPLE plan is operating within the rules?
It is essential to set up cheeks to ensure your SIMPLE plan operates within intended rules and boundaries. You should conduct an annual self-audit concerning your SIMPLE plan.
Other than the first year you set up your plan, SIMPLE plans must be maintained for a whole calendar year. Once SIMPLE plans are operational, you must continue your SIMPLE plan for the entire calendar year and funding all contributions promised in the employee notice.
If you decide your SIMPLE plan no longer suits your business , it is possible to terminate the SIMPLE plan.
How do I terminate my SIMPLE plan?
While SIMPLE planning is great, you may want to terminate an existing SIMPLE Plan. Here’s what to do:
Step 1: Inform your employees within a reasonable time before November 2 that the SIMPLE plan would be discontinued effective the following January 1.
Step 2: Notify your SIMPLE plan’s financial institution and payroll provider that you want to terminate your contributions, and you won’t be making SIMPLE plan contributions for the following calendar year.
Step 3: It is essential you keep records of your actions, but you don’t need to notify the IRS that you have terminated the SIMPLE plan.
So there you have it. To read more about getting help with you finances, check out this article about ways a financial advisor can help your business.
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- What Is a SIMPLE Plan?
Understanding SIMPLE Plans
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Limitations of a SIMPLE Plan
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Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)
Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.
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What Is a Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)?
A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) is a type of tax-deferred retirement account that may be established by employers, including self-employed individuals. The employer is allowed a tax deduction for contributions made to a SIMPLE account.
The employer may make either matching or non-elective contributions to each eligible employee's SIMPLE IRA, and employees may make salary deferral contributions.
Key Takeaways
- A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) is a tax-deferred retirement account that enables small employers to contribute to their employees' and their own retirement savings.
- Only employers who do not offer other retirement plans and have fewer than 100 employees can set up and offer a SIMPLE IRA.
- SIMPLE IRAs are easier for an employer to establish and have lower administrative and start-up costs than many other retirement plans.
- SIMPLE IRAs require employers to make a minimum contribution to the employee's account.
- The employer's yearly contribution can be either a matching contribution up to 3% of compensation or a 2% nonelective contribution for each eligible employee.
A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) is an employer-sponsored retirement plan, similar in some ways to 401(k) and 403(b) plans . SIMPLE IRAs are easier to implement and have lower start-up and administrative costs than many other retirement plans. The employer does not have filing requirements with a SIMPLE IRA.
According to Internal Revenue Service (IRS) regulations, only employers with fewer than 100 employees—and which do not offer other retirement plans—may establish a SIMPLE IRA. All employees who received $5,000 or more in compensation from an employer during any two previous calendar years and who are expected to receive $5,000 or more in compensation this year are eligible to participate in the employer’s SIMPLE IRA plan.
A SIMPLE IRA has the same rules on investments, distributions, and rollovers as traditional individual retirement accounts (IRAs).
The Employer's Two Alternatives
SIMPLE IRAs require employers to make a minimum contribution to the account, while employees are not required to contribute. The employer has two alternatives when it comes to making these contributions. The first is to match the amounts that employees make toward their own elective-deferral contribution up to 3% of the employee's annual compensation.
The second alternative is for the employer to make a flat 2% nonelective contribution to all qualified employees, regardless of whether the employee makes any contributions.
Contributions to SIMPLE IRAs are immediately 100% vested , and the IRA owner directs the investments.
A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) has lower contribution limits than most other employer-sponsored retirement plans. For 2022, the contribution limit is $14,000 (up from $13,500 in 2021). Those aged 50 or older can make a catch-up contribution of an extra $3,000 for both 2021 and 2022.
A SIMPLE IRA can only be rolled over to a traditional IRA after a two-year waiting period, beginning from the day that the employee first participated in the plan.
How Does an Employer Start a SIMPLE IRA Plan?
There are three steps to start a SIMPLE IRA plan:
- Sign an IRS Form 5304-SIMPLE, Form 5305-SIMPLE, or an IRS-approved prototype SIMPLE IRA plan offered by a qualified financial institution.
- Provide eligible employees with information about the SIMPLE IRA plan.
- Establish a SIMPLE IRA account for each eligible employee using either a custodial account or trust account.
Which Employees Can Participate in a SIMPLE Plan?
To be eligible to participate in an employer's SIMPLE Plan for a calendar year, an employee must have received at least $5,000 in compensation from the employer during any two preceding calendar years (whether consecutive or not). The employee must also reasonably be expected to earn a minimum of $5,000 in compensation for the calendar year.
Under certain circumstances, an employer can choose to exclude an employee from a SIMPLE plan. For example, an employer can choose to exclude employees who are covered by certain types of collective bargaining agreements.
Can Employees Opt-Out of a SIMPLE IRA Plan?
No, eligible employees may not opt-out of participating in an employer's SIMPLE IRA plan. They can, however, decide not to make contributions to the plan that would reduce their salary. They would then not receive any matching contributions if the employer offers these. They would receive nonelective contributions from the employer if the plan offers this.
Internal Revenue Service. " Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) ," Pages 9-11.
Internal Revenue Service. " SIMPLE IRA Plan ."
Internal Revenue Service. " IRS Announces 401(k) Limit Increases to $20,500 ."
Internal Revenue Service. " SIMPLE IRA Plan FAQs ," Select, "Rollovers."
Internal Revenue Service. " SIMPLE IRA Plan FAQ ," Select, "Establishing a SIMPLE IRA Plan."
Internal Revenue Service. " SIMPLE IRA Plan FAQs ," Select, "Participation."
Internal Revenue Service. " SIMPLE IRA Plan FAQs ," Select, "May a participant "opt out" of a SIMPLE IRA plan?"
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SEP Retirement Plans For Small Businesses
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Looking for an easy and low-cost retirement plan? Why not consider a SEP?
Simplified Employee Pension (SEP) plans can provide a significant source of income at retirement by allowing employers to set aside money in retirement accounts for themselves and their employees.
Under a SEP, an employer contributes directly to traditional individual retirement accounts (SEP-IRAs) for all employees (including themselves). A SEP is easier to set up and has lower operating costs than a conventional retirement plan and allows for a contribution of up to 25 percent of each employee's pay.
Advantages of a SEP
- Contributions to a SEP are tax deductible, and your business pays no taxes on the investment earnings.
- You are not locked into making contributions every year. In fact, each year you decide whether, and how much, to contribute to your employees' SEP-IRAs.
- Generally, you do not have to file any documents with the government.
- Sole proprietors, partnerships, and corporations, including S corporations, can set up SEPs.
- You may be eligible for a tax credit of up to $500 per year for the first 3 years for the cost of starting the plan.
- Administrative costs are low.
As you read this booklet, here are some definitions you will find helpful:
Employee – An "employee" is not only someone who works for you, but also includes you if you receive compensation from the business. In other words, you can contribute to a SEP-IRA on your own behalf. The term also includes employees of certain other businesses you and/or your family own and certain leased employees.
Eligible Employee – An eligible employee is an employee who:
- Is at least age 21, and
- Has performed service for you in at least 3 of the last 5 years.
All eligible employees must participate in the plan, including part-time employees, seasonal employees, and employees who die or terminate employment during the year.
Your SEP may also cover the following employees, but there is no requirement to cover them:
- Employees covered by a collective bargaining agreement, if retirement benefits in the collectively bargained plan were the subject of good faith bargaining;
- Nonresident alien employees who did not earn income from you; or
- Employees who received less than $750 in compensation during the year (subject to cost-of-living adjustments).
Compensation – The term generally means the pay an employee received from you for a year's work. As the owner/employee, your compensation is the pay you received from the company. You must follow the definition of compensation included in your plan document.
Establishing the Plan
There are just a few simple steps to establish a SEP.
Step 1: Contact a retirement plan professional or a representative of a financial institution that offers retirement plans. You can choose between:
- the IRS model SEP, known as Form 5305-SEP, Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement , or
- another plan document offered by the financial institution.
See Resources below for a link to the Form 5305-SEP.
Choosing a financial institution to maintain your SEP is one of the most important decisions you will make, because that entity becomes a trustee to the plan. Trustees work with employers and agree to:
- Receive and invest contributions, and
- Provide each participant with a notice of employer contributions made each year and the value of his/her SEP-IRA at the end of the year.
Trustees of SEP-IRAs are generally banks, mutual funds, insurance companies that issue annuity contracts, and certain other financial institutions that have been approved by the IRS.
Step 2: Complete and sign Form 5305-SEP (or other plan document if not using the IRS model form).
Regardless of the SEP document you choose, it will include the name of the employer, the requirements for employee participation, and a written allocation formula for the employer's contribution. When it is completed and signed, this form becomes the plan's basic legal document, describing your employees' rights and benefits. Do not send it to the IRS. Instead, use it as a reference, because it sets out the plan terms (for example, eligible employees, compensation, and employer contributions).
A SEP may be established as late as the due date (including extensions) of the company's income tax return for the year you want to establish the plan. For example, if your business's fiscal year ends on December 31 and you filed for the automatic 6-month extension, the company's tax return for the year ending December 31, 2022, would be due on October 15, 2023, allowing you to make the initial SEP contribution no later than October 15, 2023.
Step 3: Give your employees a copy of the Form 5305-SEP (or other plan document if not using the IRS model form) and its instructions, along with certain information about SEP-IRAs (described in Employee Communications below). The model SEP is not considered adopted until each employee is provided with a written statement explaining that:
- A SEP-IRA may provide different rates of return and contain different terms than other IRAs the employee may have;
- The administrator of the SEP will provide a copy of any amendment within 30 days of the effective date, along with a written explanation of its effects; and
- Participating employees will receive a written report of employer contributions made to their SEP-IRAs by January 31 of the following year.
Operating the Plan
Once in place, a SEP is simple to operate. Your trustee will take care of depositing the contributions, investments, annual statements, and any required filings with the IRS. You will need to ensure that your plan is kept current with the law.
Contributions to SEP-IRAs
Your obligation is to forward contributions to your financial institution/trustee for those employees who participate. You will want to keep your financial institution aware of any changes in the status of those employees in the plan. As you hire new employees, for instance, you will include them in the SEP if they satisfy the eligibility criteria.
Your contributions to each employee's SEP-IRA for a year cannot exceed the lesser of 25 percent of the employee's compensation for the year or a dollar amount that is subject to cost-of-living adjustments. The dollar amount is $61,000 for 2022 and $66,000 for 2023. These limits apply to your total contributions to this plan and any other defined contribution plans (other SEP, 401(k), 403(b), profit sharing, or money purchase plans) you have.
You do not have to contribute every year. When you do contribute, you must contribute to the SEP-IRAs of all participants who performed work for your business during the year for which the contributions are made, even participants who die or terminate employment before the contributions are made. Contributions for all participants generally must be uniform — for example, the same percentage of compensation.
Employee salary reduction contributions cannot be made under a SEP.
There are special rules if you are a self-employed individual. For more information on the deduction limitations for self-employed individuals, see IRS Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) .
How does a SEP work?
Here's an example.
Quincy Company decides to establish a SEP for its employees. Quincy has chosen a SEP because its industry is cyclical in nature, with good times and down times. In good years, Quincy can make larger contributions for its employees, and in down times, it can reduce the amount. Quincy knows that under a SEP, the contribution rate (whether large or small) must be uniform for all employees. The financial institution that Quincy has selected to be the trustee for its SEP has several investment funds from which the Quincy employees can choose. Individual employees have the opportunity to divide their employer's contributions to their SEP-IRAs among the funds that are made available to Quincy's employees.
Employee Communications
When employees participate in a SEP, they must receive certain key disclosure documents from you and the financial institution.
- You must give employees a copy of IRS Form 5305-SEP and its instructions (or other document that was used to establish the plan). When new employees become eligible to participate in the plan, they also must receive a copy of the plan.
- You must also provide a written statement containing information about the terms of the SEP, how changes are made to the plan, and when employees are to receive information about contributions to their accounts. (See Step 3 above.)
- In addition to the information above, the financial institution provides an annual statement for each participant's SEP-IRA that reports the fair market value of that account.
- The financial institution also gives participating employees a copy of the annual statement filed with the IRS containing contribution and fair market value information. (See Reporting to the Government below.)
- Generally, when an employee participating in the plan receives distributions from their account, the financial institution sends that employee a copy of the Form 1099-R. (See Reporting to the Government below.)
- The financial institution should notify the participant by January 31 of each year when a minimum distribution is required. (See Distributions below.)
Reporting to the Government
SEPs generally are not required to file annual financial reports with the Federal Government. SEP-IRA contributions are not included on the Form W-2, Wage and Tax Statement .
The financial institution/trustee handling employees' SEP-IRAs provides the IRS and participating employees with an annual statement containing contribution and fair market value information on Form 5498, IRA Contribution Information .
Generally, your financial institution also will report any distributions it makes from participating employees' accounts on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. . The Form 1099-R is sent to those receiving distributions and to the IRS.
Distributions
Participants cannot take loans from their SEP-IRAs.
However, participants can make withdrawals at any time. This money can be rolled over tax-free to another SEP-IRA, to a traditional IRA, or to another employer's qualified retirement plan (provided the other plan allows rollovers). Money withdrawn from a SEP-IRA (and not rolled over to another plan) is subject to income tax for the year in which an employee receives a distribution. If an employee withdraws money from a SEP-IRA before age 59½, a 10 percent additional tax generally applies.
As with traditional IRAs, participants in a SEP-IRA must begin withdrawing a specific minimum amount from their accounts by April 1 of the year after they reach age 72. After this initial year, they must withdraw an additional required minimum distribution amount by December 31 of that year and annually thereafter. The financial institution/trustee should notify the participant by January 31 of each year when a minimum distribution is required. For more information on the required minimum distribution amount, see IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs) .
Monitoring the Trustee
As the plan sponsor, you should monitor the financial institution/trustee to ensure it is doing everything it is required to do. You should also ensure that the trustee's fees are reasonable for the services it is providing. If the trustee is not doing its job properly, or if its fees are not reasonable, you should consider replacing the trustee.
Terminating the Plan
Although SEPs are established with the intention of continuing indefinitely, the time may come when a SEP no longer suits the purposes of your business. If that happens, consult with your financial institution to determine if another type of retirement plan might be a better alternative.
To terminate a SEP, notify the financial institution that you will not make a contribution for the next year and that you want to terminate the contract or agreement.
Although not mandatory, it is a good idea to notify your employees that the plan will be discontinued.
You do not need to give any notice to the IRS that the SEP has been terminated.
Mistakes … and how to correct them
Even with the best of intentions, those operating the plan can still make mistakes. The U.S. Department of Labor and the IRS have correction programs to help employers with SEPs correct plan errors, protect participants' interests, and keep the plan's tax benefits. These programs are structured to encourage you to correct the errors early.
Ongoing review makes it easier to spot and correct mistakes in plan operations. See the Resources section for further information.
Your SEP – a quick review
- Choose a financial institution to set up your SEP.
- Sign the agreement and set up the SEP-IRAs.
- Tell your employees about the plan.
- Deposit contributions by the due date of your tax return.
- Monitor your financial institution/trustee.
To find this publication and more information on retirement plans, visit:
The U.S. Department of Labor's Employee Benefits Security Administration
- Information for small businesses
- Retirement savings information for employers and employees
Internal Revenue Service
- Guidance for maintaining your SEP retirement plan
- Form 5305-SEP
- Retirement Plans Startup Costs Tax Credit
- SEP Plan Checklist
In addition, the following jointly developed publications are available on the DOL and IRS websites or can be ordered electronically or by calling toll free: 866-444-3272.
- Choosing a Retirement Solution for Your Small Business , Publication 3998, provides an overview of retirement plans available to small businesses.
- 401(k) Plans for Small Businesses , Publication 4222, provides detailed information regarding the establishment and operation of a 401(k) plan.
- Adding Automatic Enrollment to Your 401(k) Plan , Publication 4721, explains how to add automatic enrollment to your existing 401(k) plan.
- Automatic Enrollment 401(k) Plans for Small Businesses , Publication 4674, explains a type of retirement plan that allows small businesses to increase plan participation.
- Payroll Deduction IRAs for Small Businesses , Publication 4587, describes an arrangement that is an easy way for businesses to give employees an opportunity to save for retirement.
- Profit Sharing Plans for Small Businesses , Publication 4806, describes a flexible way for businesses to help employees save for retirement.
- SIMPLE IRA Plans for Small Businesses , Publication 4334, describes a type of retirement plan designed especially for small businesses.
For business owners with a plan:
- Retirement Plan Correction Programs , Publication 4224, briefly describes the IRS and DOL voluntary correction programs.
Related materials available from DOL
DOL's Small Business Retirement Savings Advisor helps small business owners choose the most appropriate retirement plan for their businesses and provides resources on maintaining plans.
Related materials available from the IRS
- Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) , Publication 560
- Contributions to Individual Retirement Arrangements (IRAs) , Publication 590-A
- Distributions from Individual Retirement Arrangements (IRAs) , Publication 590-B
- Have you had your Check-up this year? for Retirement Plans , Publication 3066
- SEP Checklist , Publication 4285
- Lots of Benefits , Publication 4118
To view these related publications, go to the IRS's website .
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Consider a Simplified Employee Pension plan for your small business
Simplified Employee Pension IRA (SEP IRA) plans are employee IRAs funded by tax-deductible contributions from small business employers.
The Simplified Employee Pension Plan, or SEP IRA, is a small business retirement plan that's easy to set up. Eligible employees establish SEP IRAs, to which tax-deductible contributions are made only by the employer. The contribution percentage can vary each year, from 0-25% of compensation. The same percentage of compensation must be contributed for all eligible participants, including the owner-employee.
Benefits of a SEP IRA
- Adds a valuable incentive for attracting and retaining better employees.
- Potential for increased worker productivity, especially if your plan is tied to profits.
- Can be combined with a traditional IRA or a Roth IRA.
- Employer can deduct all contributions made to the plan and it is not considered taxable income to the employees (although employees will owe taxes when they take withdrawals from their accounts).
- Investment earnings are tax-deferred until withdrawal.
- Flexibility: You don't have to commit to contributing every year.
SEP IRA requirements
Generally, the following requirements must be met:
- Set up by any employer — including a sole proprietorship, partnership, corporation or nonprofit organization — with one or more employees.
- Participants must be at least the age of 21.
- Include all employees who have performed services for the employer for three of the preceding five years.
- Employers have the option to offer the plan to more people, for example, all employees with at least one year of service.
- Received at least $600 in compensation from the employer during the year, for example, 2020 and 2021.
How to set up a SEP IRA
- Develop a formal written agreement that outlines the benefits to eligible employees. The agreement may be the Model SEP (Form 5305-SEP) , an IRS-approved prototype SEP from a financial institution or the employer's individually designed SEP plan document.
- Provide information about the SEP IRA to each eligible employee, including information about the eligibility requirement, general rules and guidelines of the SEP IRA plan.
- Ensure that each eligible employee has a SEP IRA established. Failure to do so could cause the IRS to disqualify the SEP plan.
The SEP plan is easy to operate. It's a tax-deductible way for small-business owners to attract and retain employees, while also saving for their own retirement. After all, the owner is generally an eligible participant. Discover more retirement plan options for small business .
The information in this article was obtained from various sources not associated with State Farm® (including State Farm Mutual Automobile Insurance Company and its subsidiaries and affiliates). While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. State Farm is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. State Farm makes no guarantees of results from use of this information.
Neither State Farm nor its agents provide tax or legal advice.
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Strategic Small Business Startup Tips
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Offering a retirement plan, including a SEP IRA, SIMPLE IRA or a 401k, is a great way for a small business to attract and retain employees.
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What is a SIMPLE IRA and who can have one?
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Small businesses tend to avoid retirement plans, largely due to their complexity and cost. Just 28 percent of small businesses offer 401(k) plans, according to a recent survey by ShareBuilder 401k. Nearly 64 percent of the survey respondents believe their business is too small to qualify for one, while about one-fifth say they can’t afford a matching contribution.
A SIMPLE IRA may be just what small businesses need to help their employees save for retirement.
What is a SIMPLE IRA?
A SIMPLE IRA offers a straightforward and inexpensive way for small businesses to establish a retirement plan for their employees.
A SIMPLE IRA can be a great way to help workers secure their future. And since employers themselves often comprise a significant portion of a small business, a SIMPLE IRA can help them set up their own retirement plan, too. The IRS permits employers (including self-employed individuals) with no more than 100 employees earning more than $5,000 in the preceding year to establish a SIMPLE IRA.
Here’s what else you need to know about the SIMPLE IRA.
How a SIMPLE IRA works
While the plan is called an IRA, a SIMPLE IRA is fundamentally different from a traditional IRA or Roth IRA. These latter IRAs are established by workers for themselves, with different annual contribution limits, plan rules, and purposes. Instead, a SIMPLE IRA looks more like a 401(k) program , but it tends to be easier for the company to set up and manage.
It’s called SIMPLE – short for Savings Incentive Match Plan for Employees – for a reason. Employers don’t have to worry about complex federal reporting requirements like they do with 401(k) plans. And they can set up the plan through a financial institution, which operates it.
A SIMPLE IRA can be set up as either pre-tax (traditional) or after-tax (Roth). The Roth SIMPLE IRA was just created by the 2022 SECURE Act 2.0 , so employers may not offer it yet.
If the SIMPLE IRA is traditional, any employee contribution goes into the account before tax. The money can grow tax-deferred for decades and then is taxed as ordinary income when it’s withdrawn at retirement, defined as beginning at age 59 ½.
If the SIMPLE IRA is a Roth, the employee contribution goes into the account after tax. Then the money can grow tax-free for decades and will be tax-free when withdrawn from the account at retirement, defined as beginning at age 59 ½.
Contribution limits
Like a traditional retirement plan, the SIMPLE IRA allows employees to have wages deducted from their paycheck. Employees can defer up to $15,500 in 2023. Those over age 50 can defer an additional catch-up contribution of $3,500. These contributions are “elective deferrals” that count toward the total annual limit on elective deferrals to this and other retirement plans.
Employers are required to chip in to their employees’ SIMPLE IRA accounts, and they have two options to contribute funds:
- Match workers’ contributions on a dollar-for-dollar basis, up to 3 percent of individual earnings.
- Make non-elective contributions up to 2 percent of wage earners’ compensation up to the annual compensation limit of $330,000 for 2023.
In addition, starting in 2024 employers may contribute an additional voluntary 10 percent of salary, up to $5,000, to each eligible employee earning at least $5,000. The $5,000 voluntary contribution amount is indexed for inflation starting in 2025.
Example of a SIMPLE IRA
Imagine you earn $60,000 a year, and your employer matches the contributions you make for up to 3 percent of your salary. You would like to save a total of 10 percent of your salary, including the match. So you decide to defer 7 percent of your own pay in each paycheck.
Over the course of the year, you would save $4,200 in pre-tax or after-tax dollars, while your employer would contribute $1,800, for a total contribution of $6,000. Since you contributed more than 3 percent of your salary, you will have received the full employer match of 3 percent.
In this scenario, you had to contribute money in order to receive the employer match. But employers may instead offer a 2 percent non-elective contribution to employees.
In this second scenario, all eligible employees would receive a contribution regardless of whether they contributed from their own salary. Based on your salary of $60,000, you would receive a total contribution of $1,200 for the year from your employer. Then you could contribute any additional amount up to the annual contribution limit.
Withdrawal rules
The withdrawal rules for SIMPLE IRAs are the same as for the respective traditional and Roth IRAs.
In terms of distributions, a traditional SIMPLE IRA functions like a traditional IRA. Money in the account is subject to tax only when it is withdrawn. While you can withdraw money at any time, a 10 percent tax may apply (as well as a special 25 percent tax in certain circumstances), unless you withdraw the funds after the standard retirement age of 59½ or under some other exception. Money in a traditional SIMPLE IRA must eventually be withdrawn under the IRS’s required minimum distribution (RMD) rules starting at age 73.
The distribution rules for a Roth SIMPLE IRA work as they do for a Roth IRA. Money will be tax-free if withdrawn after the retirement age of 59 ½. Contributions may be withdrawn at any time without tax or penalty, but any earnings will be subject to a penalty tax. The Roth SIMPLE IRA has no required minimum distributions and can be held indefinitely.
Pros and cons of SIMPLE IRAs
- Employees are fully vested as soon as they start saving, so any employer contribution becomes theirs immediately.
- Employees can contribute on a pre-tax basis (traditional SIMPLE IRA) or after-tax basis (Roth IRA).
- Earnings can grow tax-deferred (in a traditional account) or tax-free (in a Roth account) until they’re withdrawn.
- A SIMPLE IRA has lower setup costs than a 401(k), and it requires only a low amount of administrative management.
- Contribution limits are lower for SIMPLE IRAs than they are for 401(k) plans, but you can still contribute to other retirement plans on your own or through a second job.
- You’ll pay a 25 percent penalty on distributions made before age 59 ½ if it’s within the first two years of your participation in the plan and 10 percent after that. Meanwhile, the maximum that 401(k) plans penalize early withdrawals is 10 percent.
- There are no loans available on SIMPLE IRAs.
SIMPLE IRA vs. 401(k)
While SIMPLE IRAs and 401(k) plans are both useful for saving for retirement, there are some key differences between the two plans. SIMPLE IRAs are unique to small businesses and can only be used by employers with 100 or fewer workers earning no more than $5,000 annually, while 401(k) plans can be opened at any workplace with one or more employees.
Employer contributions are optional in 401(k) plans, but mandatory for SIMPLE IRAs. You’ll also have higher contribution limits in 401(k) plans than in a SIMPLE IRA.
The fees and administrative tasks involved are higher in 401(k) plans – though they’re relatively easy in a solo 401(k) plan – whereas a SIMPLE IRA has no required annual tax filing and relatively low fees. Also, investment options may be more limited in a 401(k) plan and are chosen by the employer and a plan administrator.
Both SIMPLE IRAs and 401(k) plans may come with a Roth option that allows you to make pre-tax contributions and tax-free withdrawals during retirement.
Bottom line
A SIMPLE IRA makes a great option for a small business to set up a retirement plan for its employees, with less hassle and expense than a typical 401(k) plan, and employees can benefit from the tax advantages and matching benefits of the plan. But small businesses have other attractive options, too – a SEP IRA and solo 401(k) , both of which can offer higher contribution limits – and it’s important to investigate which plan works best for your situation.
Related Articles
A complete guide to SEP IRAs: Why those who are self-employed should take a look
What is an IRA CD?
SIMPLE 401(k): A guide to get started
Solo 401(k) vs SEP IRA: Which is better?
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Simplified Employee Pension (SEP) IRA
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Small business owners can make tax-deductible contributions with this flexible plan that is easy to set up and maintain. If you have employees, you may be required to contribute for them as well.
A Simplified Employee Pension (SEP) plan may work well if you want a low-cost, easy-to-maintain retirement plan for you and your employees. Both SEP IRA and Traditional IRA contributions can be made to the same account, and you have the flexibility to change how much your business contributes from year to year.
Here are some details:
Eligibility to Contribute
You can contribute at any age if you are self-employed or a small business owner.
Maximum Annual Contribution
2023 tax year: As a small business owner you may be able to contribute up to 25% of your compensation or $66,000, whichever is less.
2022 tax year: As a small business owner you may be able to contribute up to 25% of your compensation or $61,000, whichever is less.
If you have employees, you may be required to contribute for them as well.
Tax-Deductible Contributions
As a small business owner you can deduct your contributions for yourself and your employees from your company's federal taxable income. The individual traditional IRA contribution if made - may or may not be deductible depending on individual tax filing status and modified adjusted gross income.
Taxation of Earnings and Withdrawals
Tax-deductible contributions and earnings are taxed as ordinary income when withdrawn.
Types of Investments
- Stocks, bonds, mutual funds and Advisory Products available through a Wells Fargo Advisors brokerage account.
Minimum Initial Investment
Varies by investment option
Withdrawal Penalties
10% IRS additional tax if withdrawn before age 59½ unless an exception applies.
Exceptions:
- Medical expenses in excess of 10% of AGI
- Health insurance premiums if unemployed for 12 consecutive weeks
- Qualifying higher education expenses
- Qualifying first time home purchase ($10,000 lifetime limit)
- Substantially equal periodic payments made over life expectancy
- Qualified military reservist
- Involuntary IRS levies
- Conversion to a Roth IRA
- Up to $5,000 for qualified adoption / birth expenses
Required Withdrawals
Beginning in tax year 2020, the age to start Required Minimum Distributions (RMDs) has been modified from age 70½ to age 72 (Does not affect participants who turned age 70½ on or before 12/31/2019.)
Deadline to Set Up and Fund
You may establish and fund up through the business' tax filing due date plus extensions.
Commissions and Fees
Vary by account and investment option
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What is a Simplified Employee Pension (SEP) Plan, and how does it work?
Shawn Plummer
CEO, The Annuity Expert
Saving for retirement is crucial, and it’s never too early to start. A simplified Employee Pension (SEP) Plan is a retirement plan for small businesses and self-employed individuals. It allows them to save for retirement while receiving tax benefits. This guide will delve deeper into the Simplified Employee Pension (SEP) Plan and how it works.
For employees:
Can employees also contribute to their sep-ira accounts, request a quote, what is a simplified employee pension (sep) plan.
A simplified Employee Pension (SEP) Plan is a type of retirement plan allowing employers to contribute to their employee’s retirement accounts. It’s designed for small businesses with fewer than 25 employees or self-employed individuals. SEP plans are easy to set up and have low administrative costs.
How does it work?
SEP plans are similar to traditional Individual Retirement Accounts (IRAs) but with higher contribution limits. Employers can contribute up to 25% of their employee’s compensation or $66,000 (for 2023), whichever is less. The contributions are tax-deductible for employers, and the earnings grow tax-deferred until retirement.
Here’s how SEP plans work in a nutshell:
- Employers set up the plan and choose the financial institution to manage the accounts.
- Employers make contributions to the employees’ SEP-IRA accounts.
- Employees can manage their accounts and choose the financial institution’s investment options.
- The contributions and earnings are tax-deferred until retirement, when they are withdrawn and taxed at the ordinary income tax rate.
Benefits of Simplified Employee Pension (SEP) Plan:
SEP plans offer several benefits to employers and employees, including:
For employers:
- Tax-deductible contributions : Employers can deduct their contributions to their employees’ SEP-IRA accounts from their taxable income.
- Easy to set up and maintain : SEP plans are easy to set up and have low administrative costs compared to other retirement plans.
- Employee retention : A retirement plan can help employers retain employees and attract new talent.
- Higher contribution limits : Employees can contribute up to 25% of their compensation or $66,000 (for 2023), whichever is less. This is higher than the contribution limit for traditional IRAs.
- Tax-deferred growth : The contributions and earnings grow tax-deferred until retirement, allowing the account balance to grow faster.
- Easy to manage : Employees can manage their accounts and choose the financial institution’s investment options.
Alternatives To A SEP Plan
While the Simplified Employee Pension (SEP) Plan is an excellent option for small businesses and self-employed individuals, it’s not the only retirement plan available. Here are some alternatives to a SEP plan:
- SIMPLE IRA : Savings Incentive Match Plan for Employees (SIMPLE) IRA is a retirement plan designed for small businesses with fewer than 100 employees. Employers can match employee contributions or make a fixed contribution, and employees can contribute up to $15,500 (for 2023).
- 401(k) plan : 401(k) plans are popular retirement plans for larger businesses, but small businesses can also set up a 401(k) plan. Employers can contribute to the plan, and employees can contribute up to $22,500 (for 2023).
- Solo 401(k) plan : Solo 401(k) plan is a retirement plan for self-employed individuals or business owners with no employees. It allows the business owner to contribute up to $66,000 (for 2023) as both the employer and the employee.
- Roth IRA : Roth IRA is an individual retirement account that allows individuals to contribute after-tax dollars, and the earnings grow tax-free. The contribution limit for 2023 is $6,500, with an additional $1,000 catch-up contribution for individuals over 50.
- Traditional IRA : Traditional IRA is an individual retirement account that allows individuals to contribute pre-tax dollars, and the earnings grow tax-deferred. The contribution limit for 2023 is $6,500, with an additional $1,000 catch-up contribution for individuals over 50.
- Deferred Annuities : Deferred annuities are a type of insurance policy that can be used as part of an individual’s retirement plan. They allow individuals to make tax-deferred contributions (with no limits), and the earnings grow tax-deferred until withdrawal.
We can’t stress enough how important it is to begin saving for retirement as early as possible. Researching different retirement plans and creating a plan for yourself or your business is the first step in protecting your future. We hope this guide has helped you better understand the ins and outs of the SEP Plan so that you can decide whether it’s right for you. If you still have questions, our experienced team will happily answer them during your complimentary quote. Don’t hesitate; to take charge of your future today by requesting a free quote!
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Frequently Asked Questions
Who can set up a simplified employee pension (sep) plan.
A simplified Employee Pension (SEP) Plan can be set up by employers with fewer than 25 employees or self-employed individuals.
How much can employers contribute to their employees’ SEP-IRA accounts?
Employers can contribute up to 25% of their employee’s compensation or $66,000 (for 2023), whichever is less.
No, only employers can contribute to their employees’ SEP-IRA accounts.
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Small Business
How to set up a pension plan for a small business, by sydney garrow updated on october 13, 2022.
Creating pension plans for your employees might be a smart move as a small business owner. Let’s explore some reasons why a small business pension plan could be beneficial to both you and your employees.
What are small business pension plans?
Many provisions of the tax code apply to businesses that have fewer than 50 employees. You can take advantage of tax breaks for retirement plans if your business has just one employee—you. Changes in the tax laws that went into effect in 2018 give LLCs and small business corporations many of the same tax advantages that used to be the exclusive domain of large corporations.
What kinds of pension plans are available to small businesses? Here is a rundown of your most common options:
If you’re in business for yourself (you are a sole proprietor, whether or not you have organized your business as an LLC) and your objective is:
- To save the maximum amount of money the tax laws allow, contributing to your retirement account both as your own employer and your own employee, then you should look into a solo 401(k).
- To set aside as much money for your retirement as the tax laws allow but make only employer contributions, you should look into a SEP IRA.
- To start a simple retirement plan that is easy to set up, you should start a traditional IRA.
For an easy-to-administer after-tax plan that lets your money grow tax-free, check out a Roth IRA.
If you have employees and your objective is:
- Setting up a vesting schedule to encourage your employees to stay with your company, consider a traditional 401(k).
- Avoiding nondiscrimination testing, allowing you and your most highly compensated employees to save aggressively for retirement, look into a safe harbor 401(k).
- Setting up a simple pension plan that enables your employees to save for their own retirement pensions, look into a SIMPLE IRA.
- Choosing which years you make contributions to your employee retirement accounts (for example, if your profit margins vary greatly from year to year), look into setting up a SEP IRA.
The bottom line is that small businesses of all kinds have a broad selection of employee pension plans, including solo 401 (k) plans, SIMPLE IRA plans, and traditional 401 (k) plans.
What’s the difference between qualified and non-qualified pension plans?
In 1974, Congress passed the Employee Retirement Income Security Act, also known as ERISA, to protect pensions and to provide a degree of transparency in what happens with pension plan contributions. Qualified plans get certain tax breaks that unqualified plans do not. They also have different levels of protection in the event a company goes out of business.
Here’s the bottom line.
Qualified pension plans are governed by Section 401 (a) of the Internal Revenue Code. They are governed under ERISA guidelines. Both your contributions and your employees’ contributions are owned by your employees. (You can be an employee of your own company.) These contributions don’t appear on your balance sheet, and they are owned by the employee, not your company.
There are limits on how much you can contribute to a qualified plan and how much income can be deferred. But no matter what happens to your company, qualified pension plans cannot be seized by creditors.
Nonqualified pension plans don’t fall under ERISA guidelines. They don’t receive the same tax breaks. Nonqualified pension plans are considered to be assets of the company, which means they can be seized by creditors. Employees who quit lose their benefits under these kinds of plans.
Creating pension plans could help you as well as your employees
The benefit of a small business pension plan is clear for employees—they’ll have a retirement plan to lean back on once they are done working. But did you know there might be benefits to you as the employer as well?
- Recruiting good workers. If you want to attract top talent to your small business, including benefits like a small business pension plan may help. AARP reports that 9 out of 10 Americans believe everyone should have a pension plan. And a skilled worker with a desirable skillset has the luxury to wait for a job that does offer that benefit.
- Lowering employee turnover. Losing employees and having to re-hire is neither cost-effective nor productive for a small business. If you offer employees what they need to be well covered, they might be more likely to stick with your small business.
- Keeping employees motivated. Cultivating a feeling of support with a small business pension plan may give your employees reason to stay motivated. Since some pension plans may even be based on the employee’s salary while working, your employees might be encouraged to perform well and earn more throughout their careers.
Tax benefits: all the more reason for a small business pension plan
You may be eligible for a tax credit for establishing a qualified retirement plan to offer to your employees. This could help offset the cost of creating pension plans for employees.
Talk to your accountant or a tax specialist to discuss your options for saving on taxes by offering a small business pension plan.
Pros and cons of a small business pension plan
Pros. The nice thing about a pension plan is that it gives employees some type of financial support after they are retired. From the employer’s perspective, offering a small business pension plan makes it a lot easier to retain employees.
Since the beginning of 2021, employees have been leaving their jobs at a rate of about 3% per month. In 2022, a survey said that nearly 55 million employees will quit or leave their jobs. Offering a pension plan won’t guarantee that your employees will stay on the job, but it helps, especially with employees turning 65 who are facing the reality of Social Security raising the retirement age with limited options for early retirement health insurance through the healthcare exchanges.
Cons. What’s the biggest drawback to small business pension plans? It’s simple. Returns aren’t guaranteed. Especially if you are a sole proprietor, you need to have multiple ways to save for retirement.
Pension plans can also require the employer to shoulder a lot of the responsibility of funding retirement for employees, depending on what type of plan you choose. But there are also other options out there, such as Defined Contribution Plans, so that your employees aren’t left completely without retirement savings if you can’t afford to provide a Defined Benefit Pension plan.
Creating a pension plan for your employees is up to you. You might find that there are plenty of benefits to offset the cost to your business, including the motivation and loyalty of your employees.
What are my other retirement plan options?
Many companies offer a retirement benefit to their employees in the form of whole life insurance coverage .
Post-retirement medical benefits are another highly sought-after benefit for the older workforce.
How to get started
Wondering how to set up a pension plan for a small business? Choosing the right retirement benefit to offer your employees doesn’t have to be complicated. Choosing the right investment advisor is the place to start small business retirement plans.
This article is only for general information and is not tax or legal advice. Consult your tax or legal adviser for guidance.
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What is a SIMPLE IRA and who can have one?
Small businesses tend to avoid retirement plans, largely due to their complexity and cost. Just 28 percent of small businesses offer 401(k) plans, according to a recent survey by ShareBuilder 401k. Nearly 64 percent of the survey respondents believe their business is too small to qualify for one, while about one-fifth say they can’t afford a matching contribution.
A SIMPLE IRA may be just what small businesses need to help their employees save for retirement.
What is a SIMPLE IRA?
A SIMPLE IRA offers a straightforward and inexpensive way for small businesses to establish a retirement plan for their employees.
A SIMPLE IRA can be a great way to help workers secure their future. And since employers themselves often comprise a significant portion of a small business, a SIMPLE IRA can help them set up their own retirement plan, too. The IRS permits employers (including self-employed individuals) with no more than 100 employees earning more than $5,000 in the preceding year to establish a SIMPLE IRA.
Here’s what else you need to know about the SIMPLE IRA.
How a SIMPLE IRA works
While the plan is called an IRA, a SIMPLE IRA is fundamentally different from a traditional IRA or Roth IRA. These latter IRAs are established by workers for themselves, with different annual contribution limits, plan rules, and purposes. Instead, a SIMPLE IRA looks more like a 401(k) program , but it tends to be easier for the company to set up and manage.
It’s called SIMPLE – short for Savings Incentive Match Plan for Employees – for a reason. Employers don’t have to worry about complex federal reporting requirements like they do with 401(k) plans. And they can set up the plan through a financial institution, which operates it.
A SIMPLE IRA can be set up as either pre-tax (traditional) or after-tax (Roth). The Roth SIMPLE IRA was just created by the 2022 SECURE Act 2.0 , so employers may not offer it yet.
If the SIMPLE IRA is traditional, any employee contribution goes into the account before tax. The money can grow tax-deferred for decades and then is taxed as ordinary income when it’s withdrawn at retirement, defined as beginning at age 59 ½.
If the SIMPLE IRA is a Roth, the employee contribution goes into the account after tax. Then the money can grow tax-free for decades and will be tax-free when withdrawn from the account at retirement, defined as beginning at age 59 ½.
Contribution limits
Like a traditional retirement plan, the SIMPLE IRA allows employees to have wages deducted from their paycheck. Employees can defer up to $15,500 in 2023. Those over age 50 can defer an additional catch-up contribution of $3,500. These contributions are “elective deferrals” that count toward the total annual limit on elective deferrals to this and other retirement plans.
Employers are required to chip in to their employees’ SIMPLE IRA accounts, and they have two options to contribute funds:
Match workers’ contributions on a dollar-for-dollar basis, up to 3 percent of individual earnings.
Make non-elective contributions up to 2 percent of wage earners’ compensation up to the annual compensation limit of $330,000 for 2023.
In addition, starting in 2024 employers may contribute an additional voluntary 10 percent of salary, up to $5,000, to each eligible employee earning at least $5,000. The $5,000 voluntary contribution amount is indexed for inflation starting in 2025.
Example of a SIMPLE IRA
Imagine you earn $60,000 a year, and your employer matches the contributions you make for up to 3 percent of your salary. You would like to save a total of 10 percent of your salary, including the match. So you decide to defer 7 percent of your own pay in each paycheck.
Over the course of the year, you would save $4,200 in pre-tax or after-tax dollars, while your employer would contribute $1,800, for a total contribution of $6,000. Since you contributed more than 3 percent of your salary, you will have received the full employer match of 3 percent.
In this scenario, you had to contribute money in order to receive the employer match. But employers may instead offer a 2 percent non-elective contribution to employees.
In this second scenario, all eligible employees would receive a contribution regardless of whether they contributed from their own salary. Based on your salary of $60,000, you would receive a total contribution of $1,200 for the year from your employer. Then you could contribute any additional amount up to the annual contribution limit.
Withdrawal rules
The withdrawal rules for SIMPLE IRAs are the same as for the respective traditional and Roth IRAs.
In terms of distributions, a traditional SIMPLE IRA functions like a traditional IRA. Money in the account is subject to tax only when it is withdrawn. While you can withdraw money at any time, a 10 percent tax may apply (as well as a special 25 percent tax in certain circumstances), unless you withdraw the funds after the standard retirement age of 59½ or under some other exception. Money in a traditional SIMPLE IRA must eventually be withdrawn under the IRS’s required minimum distribution (RMD) rules starting at age 73.
The distribution rules for a Roth SIMPLE IRA work as they do for a Roth IRA. Money will be tax-free if withdrawn after the retirement age of 59 ½. Contributions may be withdrawn at any time without tax or penalty, but any earnings will be subject to a penalty tax. The Roth SIMPLE IRA has no required minimum distributions and can be held indefinitely.
Pros and cons of SIMPLE IRAs
Employees are fully vested as soon as they start saving, so any employer contribution becomes theirs immediately.
Employees can contribute on a pre-tax basis (traditional SIMPLE IRA) or after-tax basis (Roth IRA).
Earnings can grow tax-deferred (in a traditional account) or tax-free (in a Roth account) until they’re withdrawn.
A SIMPLE IRA has lower setup costs than a 401(k), and it requires only a low amount of administrative management.
Contribution limits are lower for SIMPLE IRAs than they are for 401(k) plans, but you can still contribute to other retirement plans on your own or through a second job.
You’ll pay a 25 percent penalty on distributions made before age 59 ½ if it’s within the first two years of your participation in the plan and 10 percent after that. Meanwhile, the maximum that 401(k) plans penalize early withdrawals is 10 percent.
There are no loans available on SIMPLE IRAs.
SIMPLE IRA vs. 401(k)
While SIMPLE IRAs and 401(k) plans are both useful for saving for retirement, there are some key differences between the two plans. SIMPLE IRAs are unique to small businesses and can only be used by employers with 100 or fewer workers earning no more than $5,000 annually, while 401(k) plans can be opened at any workplace with one or more employees.
Employer contributions are optional in 401(k) plans, but mandatory for SIMPLE IRAs. You’ll also have higher contribution limits in 401(k) plans than in a SIMPLE IRA.
The fees and administrative tasks involved are higher in 401(k) plans – though they’re relatively easy in a solo 401(k) plan – whereas a SIMPLE IRA has no required annual tax filing and relatively low fees. Also, investment options may be more limited in a 401(k) plan and are chosen by the employer and a plan administrator.
Both SIMPLE IRAs and 401(k) plans may come with a Roth option that allows you to make pre-tax contributions and tax-free withdrawals during retirement.
Bottom line
A SIMPLE IRA makes a great option for a small business to set up a retirement plan for its employees, with less hassle and expense than a typical 401(k) plan, and employees can benefit from the tax advantages and matching benefits of the plan. But small businesses have other attractive options, too – a SEP IRA and solo 401(k) , both of which can offer higher contribution limits – and it’s important to investigate which plan works best for your situation.
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Should your small business offer a retirement plan.
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Offering a retirement plan for your employees can be a great way to boost morale and increase ... [+] retention.
Have you listened to the news recently? There's been a lot of talk about retirement, especially with the passing of the SECURE Act 2.0. Well, guess what? Your employees have probably heard the same things. And chances are, they've got more questions about retirement than usual.
As a small business owner, it can be hard to know whether you should offer a retirement plan. If you don’t offer one, you aren’t alone. It’s estimated that 74% of small businesses don’t offer a retirement plan to their employees. But even though employers see retirement plans as optional, workers probably don’t. After all, employees will need anywhere from 70% to 90% of their pre-retirement income to maintain their standard of living once they retire.
So, what about your small business ? Should you offer a retirement plan or not? Do your employees need one? Before we get to the answers, let’s have a quick overview of retirement plans to make sure we’re all on the same page.
What Is A Retirement Plan?
According to the Department of Labor , a retirement plan is “an employee benefit plan established or maintained by an employer [...] that provides retirement income or defers income until termination of covered employment or beyond.”
Retirement plans allow employees to plan for a future without work. After decades of hard work, a future without work sounds pretty good, right? It does if you’ve planned accordingly.
There are several retirement plans out there you can offer employees. And depending on your state, you may have state-mandated laws requiring that you provide employee retirement plans.
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If you’re not in a state that requires a retirement plan, should you offer one or not? To help answer the question, let’s look at some examples of retirement plans.
Examples Of Retirement Plans
Navigating the world of retirement planning can be overwhelming, especially if you’re new to the world of retirement. If your head is already spinning (or is about to!), here’s an overview of retirement plans.
Retirement plans fall into three categories:
- IRA-based plans
- Defined contribution plans
- Defined benefit plans
Let’s take a closer look at these plans and what they mean for small business owners and their employees.
IRA-Based Plans
An IRA is an individual retirement account that is easy to start and maintain. Employees can set up an IRA as part of their private plan, but businesses can also offer certain types to employees. IRAs allow employees to choose their contributions and when to withdraw funds. The cherry on top? Contributions are immediately 100% vested , and employees can access their funds from day one.
IRA-based plans include payroll deduction, simplified employee pension (SEP), and savings incentive match plan for employees (SIMPLE). These plans have their differences, including employer eligibility, who contributes, minimum employee requirements, steps to set up the plan, and more. With so many choices, finding an IRA that works for you and your employees should be easy.
Defined Contribution Plans
Unlike IRA accounts, only employers can create defined contribution plans. Defined contribution plans allow employers, employees, or both to contribute a set percentage of an employee’s annual wages. That money is then invested (e.g., stocks, mutual funds, etc.). When the employee retires, they’ll receive distributions.
Defined contribution plans can include:
- Profit sharing
- 401(k) plans (e.g., safe harbor, automatic enrollment, or traditional)
- Multiple Employer Plan (MEP)*
When considering a defined contribution plan, research the retirement plan company you’re working with. Make sure you know what you’re getting into.
*A Multiple Employer Plan lets related small businesses band together to share some of the cost and administration of a retirement plan. If the costs of retirement plans seem too high for your business, an MEP may be the perfect solution. But, MEPs aren’t for everyone. Right now, they are only available for members of trade associations (e.g., retail and service, mining, trucking, and other industries).
Defined Benefit Plans
Defined benefit plans were all the rage until the 1980s. In their hay day, defined benefit pensions accounted for 60% of private sector workers’ pension plans . Now, the number is drastically lower at 4%. Why the shift? To put it simply, it was expensive for businesses to maintain the plans, and difficult to estimate how much money was needed for an employee’s retirement.
Here’s how defined benefit plans work: Businesses fund the plans directly from company profits, and when employees retire, they reap the benefits. But, if business growth slows and profits decline, employees will still need to retire regardless of how the business is doing. And that’s the trouble with defined benefit plans. Declining profits and a generation of employees retiring simultaneously could spell disaster.
Many employers switched to defined contribution plans to save money, as they’re often funded solely by employee contributions.
Pros And Cons Of Retirement Plans
Before deciding whether to provide a retirement plan for your small business, check out the pros and cons first.
Benefits Of Retirement Plans
Retirement plans can be tricky. But the right plan can give you an edge in hiring and keeping top talent. Remember, your employees will retire at some point. And when they do, they’ll need a good bit of money to make ends meet—up to 90% of their pre-retirement income. That’s a lot of money when someone isn’t working anymore. Generally, the benefits for employees are obvious. But what about the benefits for small business owners?
Here are some of the employer benefits to offering retirement plans:
- Employer contributions (if you choose to make them) are deductible from your business income, lowering your annual tax liability
- Employers setting up a 401(k) for the first time may be eligible for business tax credits through the SECURE Act (Setting Every Community Up From Retirement Enhancement) and SECURE Act 2.0
- Employee morale, retention, and work ethic can improve when employees feel that their future is secure
Drawbacks Of Retirement Plans
Believe it or not, there are some negatives when offering retirement plans to your employees. Negatives may include:
- Some defined benefit plans can’t guarantee benefits to employees when they retire
- New employees may have to wait before they begin contributing to their plans
- Withholding employee contributions can be tricky without the right payroll software to help out
Make a workplace retirement plan work for your business and employees. Choose a secure and reliable retirement plan, decide if you want to use a waiting period, and use payroll software with free 401(k) integration to streamline the process.
Final Thoughts
Whatever you decide on, make sure you do your research. Employee retirement plans aren’t one size fits all. Luckily, there are so many options out there that you’ll be able to find the plan that fits your employees’ needs.
A retirement plan can let employees know that their future is safe so they can focus on the here and now and the work in front of them.
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Simplified Employee Pension (SEP)
Are you Self-Employed? If so you may find the Simplified Employee Pension ( or SEP) IRA to be helpful when it comes to tax savings and planning for your retirement. Whereas retirement plans all have similar rules, not all retirement plans are alike. Below you will learn what is different about the SEP retirement plan and how to decide if this plan is right for you.
CONTRIBUTIONS:
The Simplified Employee Pension IRA allows the business to contribute the lesser of 25% of business income (for 2020 it is $57,000 and for 2021 it is $58,000). This employer contribution is a pre-tax contribution. You can still open a SEP IRA contributions account and make a 2020 contribution until May 17, 2021.
You can have full-time employees and use a SEP retirement plan. You must make SEP contributions for the employee.
TAKING A PERSONAL LOAN:
The SEP IRA does not allow you to take a personal loan. No IRA allows this.
You can make a loan to other people or businesses from the Simplified Employee Pension if the borrower is not a disallowed party. Here is information regarding prohibited parties.
UNRELATED BUSINESS INCOME TAX (UBIT) and UNRELATED DEBT FINANCED INCOME TAX (UDFI):
UBIT is a tax when a SEP retirement plan invests into a business.
UDFI is applicable when an SEP IRA is using financing to buy real estate.
You can read about both these taxes HERE . Best to consult your tax advisor or uDirect when you have specific UBIT/UDFI questions. We’ll be sure to answer all your inquiries to ensure you have confidence when it comes to your account.
COSTS AND RESPONSIBILITIES OF SIMPLIFIED EMPLOYEE PENSION IRA:
The SEP IRA has a $50 set-up fee plus the first year’s annual fee of $275 to set up the SEP. Once the plan is established, you do not have any annual IRS reporting requirements. The tax reporting and record-keeping are included and are handled by the custodian. To set up your SEP retirement plan click HERE.
FINAL THOUGHTS:
Always consult a tax professional when deciding between retirement plans or any decision regarding any retirement plan. Feel free to contact us if you have questions about SEP IRAs or any other IRA-related topic. We can be reached at 866-447-6598 or [email protected]
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IMAGES
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COMMENTS
Simplified Employee Pension Plan (SEP) A SEP plan allows employers to contribute to traditional IRAs (SEP-IRAs) set up for employees. A business of any size, even self-employed, can establish a SEP. Choose a SEP Plan Establish a SEP Plan Participate in a SEP Plan Operate and Maintain a SEP Plan Correct SEP Plan Errors Terminate a SEP Plan
Simplified Employee Pension Plans (SEP IRAs) help self-employed individuals and small-business owners get access to a tax-deferred benefit when saving for retirement. With Fidelity, you have no account fees and no minimums to open an account. 1 You'll get exceptional service as well as guidance from our team. Questions 800-544-5373
SEP-IRA plans (Simplified Employee Pension) are designed to allow small-business owners or the self-employed to make sizable contributions to a retirement plan without filing a tax form. SEP-IRAs require little administration. Employees can contribute up to 25% of your annual income.
A Simplified Employee Pension (SEP) plan provides business owners with a simplified method to contribute toward their employees' retirement as well as their own retirement savings. Contributions are made to an Individual Retirement Account or Annuity (IRA) set up for each plan participant (a SEP-IRA).
A Simplified Employee Pension Plan (SEP) IRA is a flexible retirement plan offering tax benefits to business owners and their employees as well as self-employed people. 1, 2 SEP IRA Features Contribute significantly more than you could with a traditional IRA 1 Make flexible contributions that are generally tax deductible by the business 2
A Simplified Employee Pension IRA, or SEP IRA, allows self-employed people and small-business owners to save up to $66,000 in 2023 for retirement.
A simplified employee pension (SEP) is an individual retirement account (IRA) that an employer or a self-employed person can establish. The employer is allowed a tax deduction for contributions...
A SIMPLE plan is a retirement plan that companies can offer to employees, given they have no more than 100 employees. SIMPLE means Savings Incentive Match Plan for Employees of small employers. In insurance, insurance companies often serve as trustees who manage SIMPLE plans on behalf of the employer. Who Can Start a SIMPLE Plan?
A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) has lower contribution limits than most other employer-sponsored retirement plans. For 2022, the contribution limit is...
Establishing The Plan There are just a few simple steps to establish a SEP. Step 1: Contact retirement plan professional or a representative of a financial institution that offers retirement plans. You can choose between: n The IRS model SEP, known as Form 5305-SEP, Simplified Employee Pension - Individual
Simplified Employee Pension (SEP) plans can provide a significant source of income at retirement by allowing employers to set aside money in retirement accounts for themselves and their employees. Under a SEP, an employer contributes directly to traditional individual retirement accounts (SEP-IRAs) for all employees (including themselves).
A SEP IRA is a retirement plan designed for self-employed people and small business owners. Formally known as a Simplified Employee Pension, this type of plan lets entrepreneurs...
The Simplified Employee Pension Plan, or SEP IRA, is a small business retirement plan that's easy to set up. Eligible employees establish SEP IRAs, to which tax-deductible contributions are made only by the employer. The contribution percentage can vary each year, from 0-25% of compensation. The same percentage of compensation must be ...
A SIMPLE IRA makes a great option for a small business to set up a retirement plan for its employees, with less hassle and expense than a typical 401(k) plan, and employees can benefit from the ...
Simplified Employee Pension (SEP) IRA. Small business owners can make tax-deductible contributions with this flexible plan that is easy to set up and maintain. If you have employees, you may be required to contribute for them as well. A Simplified Employee Pension (SEP) plan may work well if you want a low-cost, easy-to-maintain retirement plan ...
A simplified Employee Pension (SEP) Plan is a type of retirement plan allowing employers to contribute to their employee's retirement accounts. It's designed for small businesses with fewer than 25 employees or self-employed individuals. SEP plans are easy to set up and have low administrative costs. How does it work?
To start a simple retirement plan that is easy to set up, you should start a traditional IRA. For an easy-to-administer after-tax plan that lets your money grow tax-free, check out a Roth IRA. Setting up a vesting schedule to encourage your employees to stay with your company, consider a traditional 401 (k).
A SIMPLE IRA makes a great option for a small business to set up a retirement plan for its employees, with less hassle and expense than a typical 401(k) plan, and employees can benefit from the ...
IRA-based plans include payroll deduction, simplified employee pension (SEP), and savings incentive match plan for employees (SIMPLE). These plans have their differences, including...
With a pension plan, you may lose some or all of your benefits if you leave your job before you're fully vested. Risk: With a 401(k), the employee bears the investment risk.
The Simplified Employee Pension IRA allows the business to contribute the lesser of 25% of business income (for 2020 it is $57,000 and for 2021 it is $58,000). This employer contribution is a pre-tax contribution. You can still open a SEP IRA contributions account and make a 2020 contribution until May 17, 2021.
Simplified employee pension plan synonyms, Simplified employee pension plan pronunciation, Simplified employee pension plan translation, English dictionary definition of Simplified employee pension plan. abbr. simplified employee pension American Heritage® Dictionary of the English Language, Fifth Edition. ... For Small Businesses, an IRA With ...