Retirement Savings Plans for Small Businesses
What is a SEP Plan / SEP IRA?
What is a SIMPLE IRA Plan?
A SEP Plan (Simplified Employee Pension Plan) is a retirement plan whereby an employer makes contributions on behalf of their employees. As the employer's profit fluctuates from year to year, so can the employer's contributions to the plan. SEP Plans are ideal for self-employed people and small business owners. The SEP is intended to be an attractive alternative to tax qualified retirement plans which are subject to ERISA because a SEP plan is relatively easy and inexpensive to establish and administer.
The SIMPLE IRA Plan - savings incentive match plan for
employees of small employers. Any employer with 100 or fewer employees who
earned $5,000 or more during the preceding calendar year is eligible to
establish a SIMPLE IRA plan. However, an employer that currently sponsors
another retirement plan generally cannot sponsor a SIMPLE IRA plan. A SIMPLE IRA
plan gives small businessesan affordable way to offer retirement benefits
through employee salary reductions and matching contributions (similar to those
found in a 401k plan).
Contributions to SEP plans provide valuable tax benefits to Employers. The employer contributes toward its employees' retirement savings while enjoying the benefit of reduced federal income taxes. Such tax savings can in turn be viewed as helping to fund the plan. An employer is eligible to take a federal income tax deduction under IRC Section 404(h) for amounts contributed to a SEP plan.
The only required forms for Establishment are a pre-approved IRS 5305-SEP form and an IRA application for each participant.
There are no initial or annual required filings.
Employer Contributions can vary from year to year or even skipped occasionally.
Employees are not permitted to make contributions but can decide how to invest employer contributions.
The maximum dollar amount that may be contributed is $45,000*
Eligible employees can contribute up to $10,500* through payroll deductions. Catch-up provisions allow employees 50 and older to make an additional $2,500* contribution.
When employers start these plans, they have two options for the IRAs and where the contributions are deposited:
The employer may choose the financial institution that will receive all contributions under the plan. In this case, employees will have the right to transfer contributions to a SIMPLE IRA at another financial institution without cost or penalty.
Each employee may make the initial choice of financial institution to receive contributions. In this case, an employee does not have the right to transfer to another financial institution without cost or penalty.
*2007 Contribution Limits
- future limits are subject to an
annual cost of living adjustment
Source: Department of Labor