We are generally going to recommend a 401(k) Plan for a smaller business looking to set up a retirement plan for the first time.  Clients often hear about a SEP or SIMPLE IRAs – both are marketed as cheaper and easier to maintain because they are exempt from certain IRS and Dept. of Labor filing requirements.  However, both offer little flexibility and a smaller contribution options that are often important to business owners and available via a 401(k) Plan.

What is a SEP IRA?

A SEP plan allows employers to contribute to traditional IRAs (SEP-IRAs) set up for employees. A business of any size, even self-employed, can establish a SEP.SEP-IRA-brush

  • Employees can’t have to make contributions, but will still receive employer contributions
  • Contribution amounts are limited
  •  Limited ability to put in place eligibility criteria for company contributions.
  • Employer contributions must be equal to all employees, including owners
  • Employer must transmit employee and employer contributions to each account, can be burdensome and confusing (more on this later)
  • Vesting Schedule on company contributions – not allowed
  • Participant Loans are not permitted

                                More Information:

http://www.irs.gov/Retirement-Plans/Plan-Sponsor/Simplified-Employee-Pension-Plan-(SEP)

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-SEPs-Contributions

What is a SIMPLE IRA?

SIMPLE-IRA-1024x474

  • Employees may choose to make salary reduction contributions and the employer is required to make either matching or non-elective contributions.
  • Employee contributions are limited to $12,500 in 2015 (vs. $18,000 in a 401k Plan)
  • Employee catch-up contributions are limited to $3,000 in 2015 (vs. $6,000 in a 401k Plan)
  • Employer must make a contribution each year of 2-3% of each eligible employee’s compensation
  • Employer must transmit employee and employer contributions to each account, which can be burdensome and confusing (more on this later)
  • No additional contributions can be made (vs. profit share contributions in a 401k Plan)
  • Participant loans are not allowed

More Information:

http://www.irs.gov/Retirement-Plans/Operating-a-SIMPLE-IRA-Plan

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-SIMPLE-IRA-Plans

What’s better: a SEP/Simple or a 401k Plan? A 401(k) Plan!

  • SEP & Simples are marketed as cheaper and easier because they are exempt from many of the reporting requirements, however, they lack the flexibility offered by a 401k Plan, which is particularly important to smaller or emerging/growing businesses
  • We find that businesses tend to quickly outgrow a SEP/Simple
  • Clients want to make a company contribution but take advantage of regulations that get the bulk of a company contribution into owner accounts
  • If your workforce has grown, you want the ability to put more restricting eligibility and participation criteria in place.
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