Retirement Plans for Small Businesses

There are options for small businesses that want to set up a retirement plan for their employees.  Employer and employee contributions to retirement plans are generally tax-deductible.

Two plans are specifically designed to make it easier for smaller businesses to set up a retirement plan.  These plans require very little paper work and have low administrative costs.

  • SEP – Simplified Employee Pension
  • SIMPLE – Savings Incentive Match Plans for Employees

Other options for businesses include:

  • 401(k) plans
  • Profit-sharing Plans

SEP – Simplified Employee Pension

Under a SEP, an employer contributes directly to traditional individual retirement accounts (SEP-IRAs) for all eligible employees (including themselves). A SEP does not have the start-up and operating costs of a conventional retirement plan. Contributions to a SEP are also tax deductible and your business pays no taxes on the earnings on the investments. A business of any size, even someone self-employed, can set up a SEP.

How it works:

  • The employer chooses a percentage to contribute. In 2020, this amount can be up to 25% of compensation, with a maximum of $57,000.
  • Each year, the employer can decide how much to put into a SEP, and you are not locked into making contributions every year.
  • Generally, you do not have to file any documents with the government.

Easy to set up:

  • The employer fills out a short form.
  • The employer finds a bank, mutual fund, or other financial institution with which to set up the plan. The financial institution will complete additional paperwork.
  • Administrative costs are low.

Good for employees:

  • Employees are 100% vested in all contributions;
  • Employees can choose where to invest their money; and
  • Employees keep their accounts when they change jobs.

For more information on SEP accounts: The Department of Labor’s “SEP Retirement Plans for Small Business” publication located at www.dol.gov/ebsa

SIMPLE  –  Savings Incentive Match Plans for Employees

A SIMPLE plan allows employees and employers to contribute to traditional IRAs set up for employees. It is ideally suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan. Employers with 100 or fewer employees can set up a SIMPLE.

How it works:

  • Largely funded by employee contributions, but limited employer contribution required.
  • In 2020, employees may contribute a percentage of their salary, up to $13,500 a year (plus an additional $3,000 if you’re 50 or older)
  • Each year, the employer contributes either:
  • an amount that is equal to the employee’s contribution (up to 3% of pay)

or

  • a fixed contribution of 2% of the employees’ wages

Easy to set up:

  • The employer fills out a short form.
  • The employer finds a bank, mutual fund or other financial institution with which to set up the plan. The financial institution will complete additional paperwork.
  • Administrative costs are low.
  • No IRS reporting is required.

Good for employees:

  • Employees are 100% vested in all contributions;
  • Employees can choose where to invest their money; and
  • Employees keep their accounts when they change jobs.

The Department of Labor has additional information and resources about setting up a SIMPLE Plan: “SIMPLE IRA Plans for Small Business” publication at www.dol.gov/agencies/ebsa

To learn more about the differences between a SEP and SIMPLE Plan, check out this helpful chart from USAA:  www.usaa.com/inet/pages/ira_simple_vs_sep

401(k) Plans and Profit-Sharing Plans

How 401(k)s work:

  • Employees contribute a percentage of their pay to the 401(k) up to a certain limit. In 2020, the contribution limit is $19,500 (plus an additional $6,500 if you’re 50 or older). Salary deferrals can be either on a pre-tax basis or as designated Roth contributions.
  • The employer may match the contribution.
  • 401(k)s are more complex to administer than SIMPLEs, but may allow higher contributions.
  • Unlike SIMPLE and SEPs, these plans require reporting to the government.

How profit-sharing plans work:

  • The employer bases contributions on business profits or a percentage of pay.
  • The employer can change the percentage each year.

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