IRA-Based Plans for Small Businesses

Easy is a word that can be used to describe the Simplified Employee Pension, commonly known as, “SEP.” Basically, it’s a plan that allows your business to make tax-deductible contributions to SEP IRAs set up for you and your qualifying employees.

A SEP has a lot of the same tax advantages as other retirement plans for businesses, but it frees your business from many of the administrative requirements. 

SEPs may be easy, but picking the right plan for your business isn’t. Let us help you determine which plan is right for your business. Then we can help you set up the plan and give you guidance in the years to come. Find a COUNTRY Financial representative to get started.

You might consider a SEP if you own a small business and want a retirement plan that’s easy to start and maintain. You can set up a SEP if you’re a sole proprietor, partnership or corporation.

The simplicity of a SEP is attractive to many business owners, but like most decisions, it pays to have all the facts. Here are some of the big ones to consider.

Can I set participation rules?

All eligible employees – including part-timers, seasonal and those who terminate employment during the year – must be included in the plan. However, you may restrict eligibility by requiring employees to meet all of the following:

• Be at least 21
• Been employed or performed services for you in at least three of the last five years
• Received at least $650 in compensation within the year the contribution is made (subject to cost-of-living adjustments)

Withdrawals

While the employer makes all the contributions to the employee accounts, employees can withdraw the money at any time. They will, of course, have to pay applicable taxes and penalties.

How do contributions work?

SEP IRA limits on contributions are set by the IRS and periodically adjusted. Contributions an employer can make to an employee's SEP-IRA are:

• 25% of eligible compensation to a maximum of $66,000 (indexed)

If you’re self-employed, there are special SEP IRA rules that apply to you, and your maximum contribution is effectively reduced to 20 percent of your net earnings to a maximum of $66,000 (indexed).

You must contribute the same percentage of compensation to each eligible employees’ SEP-IRA.

Your contributions are tax deductible.

Because the contributions are tax-deductible, they aren’t included in your employees’ W-2.

Of course, this information has to be shared with the IRS and your employees. COUNTRY Trust Bank can take care of that with an annual statement of contribution and fair market value information.

You don’t have to contribute every year, and the amounts can vary in the years you do contribute. But it must be based on a formula that may not discriminate in favor of highly compensated employees (HCEs).

These plans were designed with small businesses in mind. True to their name, SIMPLE IRA plans are easy to set up, and employee notices and disclosure requirements are minimal.

The two big perks to SIMPLE IRA plans are that they have a low start-up and annual cost and they’re just simpler to operate than most other plans.

The ease of set-up and low compliance demands make a SIMPLE IRA plan appealing. Deciding if a SIMPLE IRA plan is a good move for your business should be based on your specific circumstances and needs. We'd be happy to help you determine which type of plan is right for you.

You have two basic requirements to qualify to have this type of plan:

1. You can’t have more than 100 employees, all of whom must have earned $5,000 or more during the preceding calendar year.
2. You can’t have another active retirement plan during the current calendar year.

That’s it! You might consider a SIMPLE if you’re a business with fewer than 100 employees, not-for-profit organization, sole proprietor, independent contractor or freelancer.

Employee contributions

Building a nest egg for retirement starts with contributing to the plan.

• Unlike most other retirement plans, with a SIMPLE IRA, contributions of highly compensated employees or owners aren’t limited by contributions of non-highly compensated employees.
• In 2024, each participant can contribute $16,000 (indexed) or 100% of compensation, whichever is less.
• Employees aged 50 and older may contribute an additional $3,500 as a catch-up contribution.

Am I required to contribute?

As an employer, you’re required to make contributions. You do, though, have a choice between two contribution formulas:

1. A nonelective contribution where you contribute 2% of an eligible employee's compensation (up to $345,000 for 2024) regardless if the employee contributes; or
2. A dollar-for-dollar contribution where you match each employee's contributions up to 3% of the participant’s pay.

Both employer and employee contributions are tax deductible, and earnings are tax deferred.

Who can participate?

Participation rules are fairly flexible.

• You can exclude employees covered by a collective bargaining agreement and those who are not U.S. citizens.
• You aren’t required to impose any service or age requirements. However, you must open up participation to employees who earned $5,000/year from you in any two prior years (preceding the current calendar year) and are reasonably expected to earn $5,000 in the coming year.

You can be less restrictive than these two requirements, but not more restrictive.

Withdrawals

SIMPLE plans don’t have provisions for loans or hardship withdrawals. Participants can, though, withdraw any or all their money at any time. They will, of course, be subject to applicable taxes and penalties, including a 10% early distribution tax if under 59 1/2 (unless an exception applies) and the 10% is increased to 25% penalty for early distributions taken within the first two years after an employee begins participating.