Simple Retirement Plan Options for Your Business

August 19, 2021

Offering a retirement plan can be a powerful tool when you’re competing to attract the best employees. In fact, according to 2020 data from the Service Corps of Retired Executives (SCORE), only 28% of business with fewer than 10 employees offer a retirement plan.

For small businesses who want to offer a retirement plan without the administrative costs and hassles of a 401(k), your choices usually come down to either a SIMPLE IRA or a SEP IRA.

SIMPLE IRA

Employers (and the self-employed) with 100 or fewer employees can establish a SIMPLE (Savings Incentive Match Plan for Employees) plan. In 2021, employees can contribute up to $13,500 of their own earnings, along with an extra $3,000 if the employee is age 50 or older.

Employers are required to contribute to their employee’s SIMPLE account using one of two formulas: 1.) Matching the employee’s contributions dollar-for-dollar, up to 3 percent of the employee’s earnings, or 2.) Contributing 2 percent of an employee’s earnings up to the 2021 compensation limit of $290,000.

SEP IRA

Any employer, including self-employed individuals, can establish a SEP (Simplified Employee Pension) plan. Only the employer contributes to the SEP account. In 2021, the contribution limit is either 25 percent of the employee’s salary or $58,000, whichever is lower. Unlike a SIMPLE IRA, employers are not required to make annual contributions to a SEP IRA.

What you need to know

• Compete for employees with affordable retirement plans. The SEP IRA and SIMPLE IRA were created to help small business owners provide an easy and low-cost way to offer a retirement plan. You can differentiate your company by offering one of these plans and being transparent with how you calculate employer contributions.
• The employer and employee can both reap tax savings. Employees can reduce their taxable income with contributions to a SIMPLE IRA, while businesses can claim contributions to their employees’ retirement plan as a deduction on its tax return for SEP IRAs.
• Employees can still contribute to their own individual IRA. Let your employees know that in addition to having either an SEP or SIMPLE account through your company, they may also qualify to contribute to their own traditional IRA or Roth IRA.
• 401(k) plans are still an option. Being a small business doesn’t preclude you from establishing a traditional 401(k) retirement plan if you’re willing and able to deal with the extra administrative work.

Please call if you have any questions about whether a SEP or SIMPLE retirement plan might be right for your business.