Small Business Retirement Plans
Small businesses often face unique challenges when it comes to offering retirement benefits. Fortunately, plans like the Simplified Employee Pension (SEP) and the Savings Incentive Match Plan for Employees (SIMPLE) were created to help. Designed for businesses with fewer than 100 employees, both SEP and SIMPLE plans are cost-effective alternatives to traditional 401(k) plans. They are easy to set up, simple to manage, and provide employees with a convenient way to save for retirement.
Like other qualified retirement plans, SEP and SIMPLE plans offer significant tax advantages. Contributions made by employers and employees are typically tax-deductible or made on a pre-tax basis, and investment earnings grow tax-deferred. However, early withdrawals (before age 59½) may be subject to taxes and penalties.
As with all defined contribution plans, the final retirement benefit is not guaranteed—it depends on contribution levels, time in the plan, and investment performance. Upon withdrawal, funds are taxed as ordinary income, with no special 10-year averaging provision as seen with some 401(k) distributions.
Simplified Employee Pension (SEP)
A SEP is one of the easiest retirement plans for a small business to implement. Each eligible employee opens their own SEP IRA, and the employer contributes directly to it.
- Employers are not required to contribute every year, but when they do, they must contribute equally (up to 25% of compensation) for all eligible employees age 21 and older, including part-time workers.¹
- Contributions are immediately 100% vested, meaning employees own the funds outright.
- Employees manage their own SEP IRAs and can invest in mutual funds, money market accounts, or fixed-income investments.
- SEP IRA holders can also contribute to traditional or Roth IRAs, subject to income limits.
- Employers have no ongoing administrative responsibilities other than making timely contributions—there’s no account management or forfeiture tracking required.
SIMPLE IRA Plan
The SIMPLE IRA allows employees to make elective salary deferrals into their own IRA accounts, with matching contributions from the employer.
- Employees earning at least $5,000 in any two prior years and the current year are eligible to participate voluntarily.
- Employees may contribute up to $16,500 or 100% of compensation, whichever is less.²
- All contributions are 100% vested immediately.
- Early withdrawals may be subject to a 10% penalty, but withdrawals during the first two years of participation may incur a 25% penalty, unless an exception applies.
Employers are required to either:
- Match employee contributions up to 3% of compensation, or
- Contribute 2% of compensation for all eligible employees, regardless of whether they contribute.³
SIMPLE 401(k) Option
An alternative to the SIMPLE IRA is the SIMPLE 401(k), which offers similar contribution limits and employer matching requirements. However, it allows the employer to impose stricter eligibility requirements, potentially reducing overall costs.
That said, a SIMPLE 401(k) must meet the same ERISA reporting and compliance requirements as a traditional 401(k), which may increase administrative burden and expenses.
Choosing the right retirement plan for your business is an important decision. For more information on SEP and SIMPLE plans, and to discuss which may be best for your business, please contact us today.
¹ Contributions are limited to 25% of compensation or $70,000 for 2025.
² $16,500 is the 2025 limit; this amount is indexed for inflation.
³ Employers may reduce the 3% match to as low as 1% in no more than two out of five years.
