The business environment has become increasingly more competitive, and it is not practical for employers to offer their employees a traditional pension plan. A simplified employee pension plan can be the solution because it provides small businesses with an option to have an employer-sponsored retirement savings plan without the burden of compliance and costs associated with other qualified plans.
How Do Simplified Employee Pension Plans (SEPs) Work?
A SEP is a type of qualified retirement plan. It allows employers to make tax-deductible contributions to an employee’s SEP-IRA account. An employer can adopt a self-directed SEP, where the employer makes all investment decisions for the plan or choose a model portfolio provided by the plan administrator. The goal of both options is to provide retirement security and an additional vehicle for saving on taxes for employees who are eligible to participate in the plan.
There are two types of SEPs — SIMPLE and regular:
1) SIMPLE – This is a more accessible version of a traditional 401(k). While there are fewer rules involved, making this option ideal for small businesses. You cannot offer a traditional SEP if you have chosen a SIMPLE. A SIMPLE is an attractive option for small businesses because it is easy to set up and administer.
2) Regular – For those employers who want more control over the plan’s operation and administration, a regular SEP offers flexibility in contributions and investments. Still, they are required to file additional IRS forms compared to a SIMPLE. Qualified small business owners can put voluntary annual contributions up to $58,000 each year into this type of retirement plan without any tax consequences.
