Small Business SEP and SIMPLE retirement plans
If you’re considering setting up a retirement plan for yourself and your employees. However, you’re concerned about the financial commitment and administrative burdens involved. There are a couple of options to consider. Look at a Simplified Employee Pension (SEP) and a Savings Incentive Match Plan for Employees (SIMPLE).
SEPs offer easy implementation
SEPs (Simplified Employee Pension plans) offer an attractive alternative to traditional “qualified” retirement plans, especially for small businesses. Their appealing features include ease of administration and the flexibility for employers to decide each year whether to make contributions.
If you don’t currently have a qualified retirement plan, setting up a SEP is straightforward. You can use the IRS model SEP, Form 5305-SEP. By adopting and implementing this model SEP—which does not need to be filed with the IRS—you fulfill the requirements for a SEP. This allows you, as the employer, to receive a current income tax deduction for any contributions you make on behalf of your employees. Contributions are not taxed when made; instead, employees will pay taxes on distributions they receive later, typically during retirement. If necessary, you may also consider using an individually designed SEP.
When you establish a SEP for yourself and your employees, you will make deductible contributions to each employee’s IRA, known as a SEP-IRA, which must be IRS-approved. For the year 2025, the maximum deductible contribution you can make to an employee’s SEP-IRA, which they can exclude from their income, is the lesser of 25% of their compensation or $70,000. Importantly, the deduction for your contributions to employees’ SEP-IRAs is not restricted by the ceiling that applies to individual contributions to a regular IRA. Employees maintain control over their individual IRAs and investments, with earnings remaining tax-free.
To set up a SEP, you must also meet certain requirements. All regular employees must choose to participate in the program, and contributions cannot favor highly compensated employees. However, these requirements are relatively minor compared to the administrative and bookkeeping burdens associated with traditional qualified pension and profit-sharing plans.
For SEPs, the extensive recordkeeping that traditional plans require to comply with complex nondiscrimination rules is not necessary. Employers are not obligated to file annual reports with the IRS, which can often require professional assistance, such as an actuary. Typically, a trustee—like a bank or mutual fund—will handle the necessary recordkeeping for SEP-IRAs.
SIMPLE plans meet IRS requirements
Another option for businesses with 100 or fewer employees is a Savings Incentive Match Plan for Employees (SIMPLE). With these plans, a SIMPLE IRA is created for each eligible employee, and the employer makes matching contributions based on the contributions that participating employees elect under a qualified salary reduction arrangement. The SIMPLE plan has significantly fewer requirements than traditional qualified retirement plans.
Alternatively, an employer can adopt a SIMPLE 401(k) plan, which has similar features to a SIMPLE IRA and allows the employer to avoid the complex nondiscrimination tests required for traditional 401(k) plans.
For the year 2025, SIMPLE deferrals are permitted up to $16,500, with an additional catch-up contribution of $3,500 for employees aged 50 and older.
Unique advantages
As you can see, SEP and SIMPLE plans offer unique advantages for small business owners and their employees. Neither plan requires annual filings with the IRS. Contact us at 856-665-2121 for more information or to discuss any other aspect of your retirement planning.
RJC – April 21, 2025
