Tax & Business Alert
Abstract: Business owners who wish to set up a
retirement plan for themselves and their employees may be worried about the
financial commitment and administrative burdens involved. This article looks first at a “simplified
employee pension” (SEP). Small business owners who establish and contribute to
a SEP by the due date of their 2023 tax returns can still see tax savings for
2023. A sidebar describes a second retirement saving option, which is a
“savings incentive match plan for employees” or SIMPLE.
If you’re looking for a retirement
plan for yourself and your employees, but you’re worried about the financial
commitment and administrative burdens involved, there are some options to
consider. One possibility is a “simplified employee pension” (SEP). This plan — which comes
with relative ease of administration and the discretion to make or not make
annual contributions — is especially attractive for small businesses.
Note:
There’s still time to see tax savings on your 2023 tax return by establishing
and contributing to a 2023 SEP, right up to the extended due date of the
return. For example, if you’re a
sole proprietor who extends your 2023 Form 1040 to October 15, 2024, you have
until that date to establish a SEP and make the initial contribution, which you
can then deduct on your 2023 return.
SEP
involves easy setup
You
can set up a SEP easily using the IRS model SEP, Form 5305-SEP. This form,
which doesn’t have to be filed with the IRS, satisfies the SEP requirements. As
the employer, you’ll get a current income tax deduction for contributions you
make on behalf of your employees. Your employees won’t be taxed when the
contributions are made but will be taxed later when distributions are made,
usually at retirement. You can also opt for an individually designed SEP —
instead of the model SEP — depending on your needs.
The
maximum deductible contribution that you can make to a SEP-IRA — and that can be
excluded from income — is the lesser of: 1) 25% of compensation, or 2) $69,000
for 2024 (up from $66,000 for 2023) per employee. Note, however, that if the
business owner doesn’t receive a W-2 from the business (for instance, from an unincorporated
sole proprietor), the calculation for the contribution to be made on behalf of
the owner varies slightly. The deduction for your contributions to employees’
SEP-IRAs isn’t limited by the deduction ceiling applicable to an individual’s
own contribution to a regular IRA. Your employees control their individual IRAs
and IRA investments as well as the tax-free earnings.
There
are other requirements you’ll have to meet to be eligible to establish and make
contributions to a SEP. Essentially, all regular employees must elect to
participate in the program, and contributions can’t discriminate in favor of
highly compensated employees. But these requirements are minor compared to the
bookkeeping and other administrative burdens connected with traditional
qualified retirement and profit-sharing plans.
SEPS
don’t require the detailed records that traditional plans must maintain. Also, there
are no annual reports to file with the IRS, and the recordkeeping that is
required can be done by a trustee of the SEP-IRA — usually a bank or mutual
fund.
Contact
us for more information. We can also provide information about this or any
other aspect of your retirement planning.
Sidebar:
Another
option: SIMPLE plans
A
business with 100 or fewer employees may want to consider a “savings incentive
match plan for employees” (SIMPLE). The employer establishes a “SIMPLE IRA” for
each eligible employee, making matching contributions based on amounts elected
by participating employees under a qualified salary reduction arrangement. The
SIMPLE plan is also subject to much less stringent requirements than
traditional qualified retirement plans.
Another
option: An employer can adopt a “simple” 401(k) plan, with similar features to
a SIMPLE plan. It is not subject to the otherwise complex nondiscrimination rules
that apply to 401(k) plans.
For
2024, SIMPLE deferrals are limited to $16,000 (up from $15,500 for 2023). Additional
$3,500 catch-up contributions are also allowed for employees ages 50 and older.
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