Small Business Retirement Plans

Starting a retirement savings plan can be easier and simpler than most small business owners think.

Small businesses have the challenge of keeping their employees working for them since, generally speaking, small businesses offer a slightly lower pay. One way to keep employees working for you is by offering them a retirement plan.

If you are looking for an easy and low-cost retirement plan, one thing you can consider is an SEP or a Simplified Employee Pension. Simplified Employee Pension plans can offer a significant source of income during retirement. SEP plans allow an employer to set aside money for themselves and for their employees in a retirement account. There are no start-up and operating costs in SEP plans which make it very practical and affordable. In SEP, employers directly contribute to traditional individual retirement accounts (or SEP-IRAs) for all employees including themselves. A contribution of up to 25% of the employee’s pay is allowed in the SEP.

Benefits of a Simplified Employee Pension

  • The contributions made to an SEP are tax deductible. Your business is therefore not required to pay taxes on the earning on the investments.
  • You are not required to make a certain amount of contributions every year. SEP plans allow you to decide whether you contribute or not and how much you contribute annually in your employees’ SEP-IRAs.
  • You are not required to file any documents with the government when you offer SEP plans.
  • Several kinds of businesses may offer SEPs. These include sole proprietors, partnerships and even corporations.
  • Your business may be eligible for up to $500 of tax credit per year for each of the first 3 years of the cost of the SEP starting plans.
  • Administrative costs are generally low.

SEP Guidelines

The general guidelines on setting up a Simplified Employee Pension plan are as follows:

  1. Choose the right financial institution to set up your SEP plans.
  2. Sign an agreement with them and set up your employees’ individual retirement accounts or SEP-IRAs.
  3. Inform your employees about the Simplified Employee Pension plan for them to be aware about it.
  4. Remember to deposit contributions by the due date of your business’s tax return.
  5. Always monitor your financial institution or trustee. If they are offering fees that are not reasonable for their services, you must consider replacing the trustee.

Although SEPs are established to be an indefinitely continuous plan, there may come a time when your business can no longer be supported by an SEP. That is the time when you must consult your financial institution about which alternative may better suit your business’s needs. To terminate an SEP, you must notify the financial institution that no contributions will be made in the next year and that you want to terminate the agreement or contract. It is not mandatory to do so, however, it is best if you notify your employees that the plan will be discontinued.