Offering an employer-sponsored retirement plan can be beneficial, but it may require an administrative and financial commitment. A SEP IRA or SIMPLE IRA may be easier, lower-cost alternative to operating other types of retirement plans. Advantages of offering a SEP or SIMPLE IRA include:
- Employers can help employees set up their IRAs
- The plans are relatively easy to set up
- Plan administration is relatively simple
SEP IRAs
WHAT IS A SEP IRA?
A SEP (simplified employee pension) IRA is an employer-sponsored retirement plan funded solely by employer contributions.
HOW IS A SEP IRA ESTABLISHED?
A SEP IRA is established by adopting a SEP agreement. You can get it at irs.gov (Form 5305-SEP). Some financial services companies may also be able to give you a prototype SEP agreement when you establish a SEP IRA.
HOW MUCH CAN BE CONTRIBUTED TO A SEP IRA?
The employer can contribute up to the lesser of 25% of an employee’s compensation or $57,000 (2020).
DO SEP CONTRIBUTIONS HAVE TO BE MADE EVERY YEAR?
No. Contributions are not required to be made every year; however, any year that contributions are made, they must be made for every eligible employee.
3 EASY STEPS TO ESTABLISH A SEP IRA
STEP 1: Get a SEP plan document (Form 5305-SEP), either from the IRS or the financial institution where you are setting up the SEP.
STEP 2: Provide eligible employees with a copy of the SEP plan document and work with your financial professional or institution to set up a SEP IRA for each eligible employee.
STEP 3: Contribute to each participant’s SEP IRA before the deadline, which is when the employer’s tax return is due (plus extensions).
SIMPLE IRAs
WHAT IS A SIMPLE IRA?
A SIMPLE (savings incentive match plan for employees) IRA is an employer-sponsored retirement plan that can be funded with employer and employee pretax contributions. SIMPLE IRAs give employees the opportunity to contribute a portion of their salary to their own retirement account in addition to the employer’s contribution. There is a 100-employee limitation.
HOW IS A SIMPLE IRA ESTABLISHED?
The employer sets up the plan by getting a SIMPLE plan document from irs.gov or from a financial institution. The employer must decide whether all employees will have to use the same financial services company (use Form 5305-SIMPLE), or whether they can select their own financial services company (use Form 5304-SIMPLE).
WHICH EMPLOYER CONTRIBUTION OPTION SHOULD I CHOOSE?
If the matching contributions option is elected, the amount of salary contributions made by the employees will determine the amount of the employer contribution. Under the nonelective contributions option, the employer contribution is 2% of employee compensation regardless of employee salary contributions (there are limitations on compensation, $285,000 in 2020). That being said, the employer contribution under the matching contributions option is dependent upon employee participation, while the nonelective contributions option provides a more predictable employer contribution. Your financial professional can help you determine which option is best for you and your business.
HOW MUCH CAN BE SAVED IN A SIMPLE IRA?
Employee contribution for 2020: Up to $13,500 per year, with a $3,000 catch-up allowed for participants age 50 or older. Employer contribution: The employer has two choices on how they make contributions.
- Matching contributions: The employer must match the amount of the employee’s salary contribution up to 3% of the employee’s compensation. The employer does not have to make a contribution for employees who choose not to contribute any salary.
- Nonelective contributions: Instead of making a matching contribution, the employer can elect to make a contribution of 2% of compensation for all eligible employees (there are limitations on compensation, $285,000 in 2020).
4 EASY STEPS TO ESTABLISH A SIMPLE IRA
STEP 1: Get a SIMPLE plan document from irs.gov or your financial institution. Use Form 5305-SIMPLE if you would like to work with one financial institution or Form 5304-SIMPLE if you would like to give your employees the option to choose their own financial institution.
STEP 2: Select the employer contribution option. The employer contribution can be either a dollar-for-dollar match, up to 3% of compensation, or a 2% nonelective contribution.
STEP 3: Provide employees with a copy of the IRS form you chose and work with your financial professional or institution to establish a SIMPLE IRA for each eligible employee.
STEP 4: Send salary contributions to the financial institution on behalf of the employee as soon as administratively feasible, but no later than 30 days after the end of the month for which the contributions are to be made. Make the matching or nonelective contribution to the employee’s SIMPLE account no later than the due date for the employer’s tax return (including extensions).
If you would like to see if a SEP or SIMPLE Plan could be right for your business call us at 630-799-8350 or email us at info@crosspointwealth.com
If you would like a no obligation, second opinion into your current SEP or SIMPLE Plan to see if your plan measures up let us know. We look forward to the opportunity to show where there may be inefficiencies and earn your business.
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