SEP IRA plans Vs. SIMPLE IRA plans

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

Tax Credit

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.