A few weeks ago, we started looking at Simplified Employee Pension plans, which are alternative retirement savings plans to traditional IRA or 401k accounts. These accounts are typically most beneficial to individuals who are self-employed or who own small businesses. Last time, we talked about how Simplified Employee Pension plans benefit the self-employed, so this post will look at how these plans help small business owners.
Setting up a Simplified Employee Pension plan for your business requires practically zero paperwork; you need to fill out the IRS Form 5305-SEP initially, but you don’t have any forms to fill out or submit annually. After filling out the form to set up the plan, you just have to let all of your employees know about the plan, and set up accounts for each of your employees who are qualified to participate.
Most employers are drawn to Simplified Employee Pension plans because of their unmatched flexibility compared to every other type of retirement plan. When it comes to employer contributions to these types of plans, all others (traditional IRAs, 401ks, etc.) require the same employer contribution every year. For Simplified Employee Pension plans, employers can decide how much money will be contributed each year, which allows them to contribute more when revenue is up, and less when revenue is down. This puts a lot less of a strain on the employer during tougher economic times.
Additionally, there’s a much higher allowance for contribution to Simplified Employee Pension plans, which is another huge draw for many employers. Contributions to SEP plans are tax deductible, and are allowed to be up to 25% of the employee’s pay. It’s important to note that contributions to each account must be equal, so if you contribute 20% to one employee’s salary to his account, you need to contribute 20% of everyone else’s salaries to their respective accounts.
The downside to Simplified Employee Pension plans is that unlike 401k plans, the contributions are made entirely by the employer, without any contribution by the employee. However, these still wind up being the plan of choice for many small business owners who only have a handful of employees.
If you have more questions about which retirement savings plan is the best choice for your small business, the certified public accountants at DeFreitas and Minsky LLP would be happy to give you a hand. Get in touch today.