If you’re a small employer looking to sponsor a retirement plan for yourself and your employees, your first thought might be, “Let’s do a 401(k)!” And that’s certainly an option worth considering, even if you’re self-employed.
However, don’t limit yourself to only that one popular plan type. There are other choices that may better suit your situation, be easier to administer and still provide some nice tax breaks. Here are a couple to consider.
Simplified Employee Pension IRA
This plan type is relatively inexpensive to launch and easy to maintain. A Simplified Employee Pension IRA (SEP IRA) doesn’t require annual employer contributions. That means you can choose to contribute only when cash flow allows.
Typically, there are no setup fees for a SEP IRA, though participants generally must pay trading commissions and fund expense ratios (a fee typically set as a percentage of the fund’s average net assets). In 2023, the contribution limit is $66,000 or up to 25% of a participant’s compensation. That amount is much higher than the $22,500 limit for 401(k)s.
Employer contributions are tax-deductible. Meanwhile, your employees won’t pay taxes on their SEP IRA funds until they’re withdrawn. Participants are always 100% vested in the account.
There are some disadvantages to consider. This is an employer-owned plan, so employees don’t make their contributions — you have to make them. Also, unlike many other qualified retirement plans, participants age 50 and over can’t make additional “catch-up” contributions.
Savings Incentive Match Plan for Employees IRA
The IRS describes the Savings Incentive Match Plan for Employees IRA (SIMPLE IRA) as “ideally suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan.” It essentially lets employees contribute to traditional IRAs created by the employer.
True to its name, a SIMPLE IRA doesn’t require the employer to file IRS Form 5500, “Annual Return/Report of Employee Benefit Plan.” Nor must you submit the plan to nondiscrimination testing, which is generally required for 401(k)s.
Meanwhile, employees face no setup fees and enjoy tax-deferred growth on their account funds. Best of all, participants can contribute more to a SIMPLE IRA than they can to a self-owned traditional or Roth IRA. The 2023 contribution limit for this plan type is $15,500, and catch-up contributions for participants age 50 and over are allowed to the tune of $3,500 this year.
On the downside, that contribution limit is lower than that for 401(k)s. Also, because contributions are made pretax, participants can’t deduct them, nor can they take out plan loans. What’s more, employer contributions are mandatory — so you can’t skip them if cash flow gets tight. An employer can, however, generally deduct contributions to a SIMPLE IRA.
Stay in the game
A retirement plan is a central component of most midsize to large employers’ benefits packages. The good news is smaller organizations need not feel left out of the game. You’ve got options, too. Contact us for help assessing the costs and tax impact of any retirement plan or other employer-sponsored benefit that you’re considering.