Maximizing Retirement Benefits with SEP and SIMPLE Plans

If you're considering setting up a retirement plan for yourself and your employees but are worried about the financial commitment and administrative burdens, there are two options worth exploring: Simplified Employee Pension (SEP) and Savings Incentive Match Plan for Employees (SIMPLE).

Simplified Employee Pension (SEP)

SEPs are designed to be an attractive alternative to traditional retirement plans, especially for small businesses. They offer ease of administration and allow employers discretion in deciding whether to make annual contributions. If you don't already have a qualified retirement plan, you can set up a SEP using the IRS model SEP, Form 5305-SEP, which doesn't need to be filed with the IRS. This model SEP satisfies the SEP requirements, allowing employers to get a current income tax deduction for contributions made on behalf of employees. Employees won't be taxed when contributions are made but will be taxed later when distributions are received, usually at retirement. Depending on your needs, an individually-designed SEP may be more appropriate.

When you set up a SEP, you'll make deductible contributions to each employee's IRA, called a SEP-IRA, which must be IRS approved. For 2025, the maximum deductible contribution to an employee's SEP-IRA is the lesser of 25% of compensation or $70,000. The deduction for contributions to employees' SEP-IRAs isn't limited by the deduction ceiling applicable to individual contributions to regular IRAs. Employees control their individual IRAs and IRA investments, with earnings being tax-free.

To be eligible to set up a SEP, all regular employees must elect to participate, and contributions can't discriminate in favor of highly compensated employees. These requirements are minor compared to the administrative burdens associated with traditional pension and profit-sharing plans. SEPs don't require detailed records to comply with complex nondiscrimination rules, and employers aren't required to file annual reports with the IRS. Recordkeeping can be done by a trustee of the SEP-IRAs, usually a bank or mutual fund.

Savings Incentive Match Plan for Employees (SIMPLE)

Another option for businesses with 100 or fewer employees is a SIMPLE plan. Under these plans, a SIMPLE IRA is established for each eligible employee, with the employer making matching contributions based on contributions elected by participating employees under a qualified salary reduction arrangement. SIMPLE plans are subject to less stringent requirements than traditional retirement plans. Employers can also adopt a SIMPLE 401(k) plan, which has similar features to a SIMPLE IRA plan and avoids the complex nondiscrimination test for traditional 401(k) plans.

For 2025, SIMPLE deferrals are allowed up to $16,500, plus an additional $3,500 catch-up contribution for employees aged 50 or older.

Unique Advantages

SEP and SIMPLE plans offer unique advantages for small business owners and their employees. Neither plan requires annual filings with the IRS. Contact us for more information or to discuss any other aspect of your retirement planning.