Many small businesses want to help their employees prepare for retirement but aren’t sure they have the size to warrant a retirement plan like a 401(k). For some, the answer may be a Simplified Employee Pension plan, with which a company can contribute toward their workers’ retirements and augment their own as well. For example, the employer can contribute to an IRA for each participating employee with a SEP.
According to the IRS, any employer, including self-employed persons, can establish a SEP. The three steps for getting started are:
If a business creates a SEP, the employer can determine the eligibility requirements but must allow the following:
The employer can set a lower age minimum or allow workers to receive immediate or quicker eligibility if preferred. However, the requirements must be the same for all employees.
The employer makes contributions to the SEP account, subject to IRS limits. The contributions must be the same percentage of compensation for each employee and cannot be greater than 25 percent of salary, with a dollar limit in 2022 of $61,000. The SEP-IRA can also receive contributions from an employee up to the maximum annual contribution limit in many cases. If the SEP-IRA does not permit employee contributions, the employee can still make contributions to another IRA. However, the taxpayer needs to be aware that contributions to the SEP-IRA may reduce the amount they can contribute to other traditional and Roth accounts.
Typically, the employee can choose from investment options and manage their own account selections. Earnings, like contributions, are tax-deferred. However, withdrawals taken in retirement are taxed at the person’s tax rate at that time.
It’s a good idea to talk to your Taylor Benefits Insurance employee benefit plans specialist about your SEP, but here are some points to keep in mind:
SEP IRAs are attractive to sole proprietors and small companies due to their ease of implementation, low maintenance administration, and flexibility.
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