Small business owners have a number of alternatives to choose from when it comes to establishing retirement plans for their business.  Each plan type can vary in their contribution level and matching requirements, as well as their ongoing regulatory and administrative burden.

In order to make an informed decision as to the type of retirement plan that works best for you, it is important that you consider the specifics of your business.  However, here are descriptions and key attributes of several retirement plans that you may want to consider:

SIMPLE IRA

SIMPLE IRA plans are only available to employers with fewer than 100 employees.  Many small businesses choose a SIMPLE IRA simply because they are relatively inexpensive to establish and easy to maintain.  A SIMPLE must be established by October 1 of the year in which the plan first takes effect.

SIMPLE plans are ideal for most small businesses although the maximum contribution is much lower than a 401(k) plan.  Each employee can contribute up to $13,500 of their salary to the plan ($16,500 age 50+).  In most cases, employers establishing SIMPLE plans for their business are required to make matching contributions (up to 3% of salary) for those employees who participate in the plan.

SEP IRA

SEP IRAs are a type of “pension” plan for the self-employed.  SEPs can be established as late as the due date of your tax return (including extensions).  It is therefore possible to establish and contribute to a SEP IRA as late as October 15, 2022 for the 2021 tax year (allowing the use of tax refunds to help with the funding)! 

Because SEP IRAs are actually a pension plan, 100% of the contribution to SEPs are made by the employer.  Employers are not required to make an annual SEP contribution.  However, if employers contribute to their own account, they are required to also make contributions to their employees’ accounts in most cases.

It is possible to fund up to 25% of each employee’s compensation into a SEP plan up to a maximum of $58,000 ($64,500 if over age 50).  For an unincorporated owner or partner, the maximum SEP contribution is 20% of net self-employment income.  Each participant is always 100% vested in this plan and participants are generally allowed to choose their own investments. 

Individual 401(k) Plans

Individual 401(k) plans are qualified plans that can be established by business owners who have no additional employees other than their spouse.  Individual 401(k)s are affordable to establish, but they are slightly more complex than SEPs and SIMPLE plans.  Also, Individual 401(k)s need to be established by December 31 of the year that the plan begins.

The “employee” can defer up to $19,500 from their salary to the plan ($26,000 if over age 50).  In addition to employee deferrals, there is also a profit sharing component that can enable an additional contribution of up to 25% of compensation.  The maximum contribution (deferral and profit sharing combined)  to an Individual 401(k) plan is $58,000 ($64,500 if over age 50).  Deferrals to the plan must be made by the due date of the business tax return including extensions.