One of the most important decisions a business owner makes concerns whether or not to have a Qualified Retirement Plan (QRP). Once the decision is made, then the business owner must determine what type of QRP to have. A number of issues must be considered when making this decision. They include number of employees, employee participation, employer contributions and administration costs.
Costs to establish and administer 401(k)s can be high, especially for the smaller business. Less costly alternatives are available. Two such plans are the SEP IRA Plan and the SIMPLE IRA Plan. Even though they are considered QRPs they use IRAs as the investment vehicle and usually the cost of administration is lower.
This article will review some of the factors to consider.
Eligibility SEP: All businesses, regardless of number of employees SIMPLE: Only IRS Small Business — with less than 100 qualified employees
With other QRPs SEP: Yes SIMPLE: No
Employer Contributions SEP: Yes – Optional SIMPLE: Yes – Mandatory
Employee Contributions SEP: No – Salary Reduction SEPs can no longer be established SIMPLE: Yes – With pretax dollars
Contribution Limits SEP: 25% of employee’s compensation up to $51,000 for 2013, all eligible employees must receive the same percentage (Self-employed can only contribute 20%)
SIMPLE: Dollar-for-dollar of employee’s deferral up to 3% of employee’s compensation up to $12,000, $14,500 if age 50 or older for 2013
Early Withdrawal SEP: Usual IRS 10% penalty if taken before attaining age 59½ SIMPLE: 25% penalty if taken in first two years, then the usual IRS 10% penalty
Deadlines to Establish SEP: Due date of the business tax return including extensions. SIMPLE: As late as Oct 1 for the first year
Deadlines for Payments SEP: Due date of the business tax return including extensions SIMPLE: Employee Deferrals – within 7 days. Employer Match – by due date of the business tax return including extensions.
Eligible for Start-up SEP: Yes SIMPLE: Yes
This brief comparison is not intended to addresses all the rules, regulations and procedures for SEP and SIMPLE IRA Plans. It is only intended to give you some factors to consider and to point out to you that there are many factors that should be considered when making this decision. Even though SEP and SIMPLE IRA Plans can be easier to administrate, they both have many complicated rules that must all be considered.
***IMPORTANT*** When making a decision as important as this,
each business owner should rely on its own tax and legal counsel.