Small Business Retirement Plans

Small-business owners often assume that company-sponsored retirement plans are out of reach for them and their employees. 401(k) plans can be complex and costly, and small businesses have plenty of other things to focus on. The creation of the Simplified Employee Pension (SEP) and the Savings Incentive Match Plan for Employees (SIMPLE) IRA, however, allows a way for small businesses to offer their employees a streamlined retirement plan option. The SEP and SIMPLE were designed for businesses with less than 100 employees, and they are both easy to understand and provide a convenient way to save for retirement.

As qualified retirement plans, SEPs and SIMPLEs enjoy the same tax treatment as other plans, but they are less complex to set up and maintain. Contributions by employees and employers are tax deductible, or made with pre-tax dollars, and the accumulation inside the accounts grows tax-deferred. At the time of distribution, withdrawals are taxed as ordinary income.

In a SIMPLE Plan, employees establish their own IRA, to which they can electively make tax-deductible contributions. Employees who earn at least $5,000 during any two prior years as well as the current year are eligible to participate on a voluntary basis. One important benefit of the SIMPLE plan is that it allows for higher contribution limits than Roth and Traditional IRAs. In 2024, for instance, employers and employees can contribute $16,000 annually or 100% of their compensation, whichever is less.1 Employee funds are 100% vested, and the employer can elect to match the employee’s contributions up to 3%.2

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$14,000 is the current maximum and the amount is indexed for inflation.
An employer may make less than the 3% contribution for two years out of five year period but it cannot be less than 1%.