Simple IRA Plans:

A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE Plan) is a retirement plan specifically designed for small employers.   A SIMPLE Plan allows for elective salary deferrals by employees $14,000 in 2022 (or 100% of compensation, whichever is less).  The employer is required to contribute to the plan either by matching dollar for dollar up to 3% compensation (can go as low as 1% in 2 out of 5 rolling calendar years) or, the employer must make a non-elective amount of 2% to eligible employees, regardless if they contribute to the plan or not.  The employer cannot make any additional contributions and may not sponsor any other retirement plan in conjunction with a SIMPLE Plan.

A SIMPLE Plan does not have any non-discrimination tests and therefore allows for the highly compensated employees (HCE) to defer up to the maximum ($14,000) in 2022 without any consideration to deferral % or amounts made by other non-HCE employees.

For employees who will turn 50 years old within a taxable year, catch-up contributions are allowed in the amount of up to $3,000 in 2022.

SEP IRA Plans:

For small business employers a Simplified Employee Pension (SEP) plan was created.  A Simplified Employee Pension (SEP) plan was created by Congress to meet the retirement savings needs of small business employers. The plan allows the employer to contribute up to 25% of earned income or $61,000, whichever is less for 2022.

Below are some of the many benefits and advantages of establishing and maintaining a SEP plan.

  • A SEP can be sponsored by any kind of employer, including a corporation, sole proprietor, partnership, etc.
  • A SEP plan does not have to be established and/or funded until the employer’s tax filing date (plus extensions).
  • A SEP plan, like a Profit Sharing Plan, permits contributions of up to 25% of compensation (with the compensation cap of $305,000 that equates to $61,000 or whichever is less for 2022.
  • A SEP is the easiest to establish and easiest to maintain of all the retirement plans. A SEP can also be maintained in conjunction with a qualified plan such as a Money Purchase Plan, providing a prototype SEP document  is utilized.
  • A SEP is a simple and cost effective way to provide a valuable retirement program for employees. It may also serve as a competitive edge in attracting and retaining quality employees.
  • A SEP can grow with an employer’s business since it offers the maximum degree of flexibility. An employer sponsoring a SEP can decide on a year by year basis whether to contribute and how much to contribute. This flexibility allows an employer to fully consider his or her own retirement savings objectives and current year financial capabilities in making contribution decisions. Unlike a qualified plan, a SEP can be maintained for as few as one or two years or not have any contributions made to it for several years without any adverse IRS consequences.
  • As the employee demographics and/or the employer’s needs and objectives for retirement savings change over time, a SEP can be replaced at any time by a qualified plan such as a profit sharing plan, again, with no adverse consequences.
  • A SEP is funded by means of making deposits directly into the IRAs of all eligible employees. IRAs are generally the least costly retirement accounts to maintain.
  • A SEP in most cases will eliminate or at least minimize an employer’s fiduciary liability as well as the cost and concerns associated with this liability. This is so because the location of the IRA and the investments within it are the responsibility of, and at the discretion of, the employee.
  • Finally, a SEP reduces the employer’s Federal Income tax liability because all SEP contributions, (up to the lesser of 25% of each eligible employee’s compensation, not to exceed $61,000 per employee) are deductible.