Business Retirement Plans
Offering a retirement plan is an important component of a comprehensive employee benefits strategy. Employer-sponsored retirement plans not only help employees work toward long-term financial security, but also provide meaningful tax advantages to businesses and business owners.
Plans such as the 401(k), Simplified Employee Pension (SEP), and Savings Incentive Match Plan for Employees (SIMPLE IRA) offer flexible ways to structure retirement benefits based on workforce needs, compensation strategies, and administrative preferences.
Qualified Retirement Plans Overview
The creation of the Simplified Employee Pension (SEP) and the Savings Incentive Match Plan for Employees (SIMPLE) expanded the range of retirement plan options available to employers. These plans provide alternatives to traditional 401(k) arrangements while still offering employees an effective and straightforward way to save for retirement.
As qualified retirement plans, SEPs, SIMPLE IRAs, and 401(k)s receive favorable tax treatment. Employer contributions are generally tax deductible, employee contributions are often made on a pre-tax basis, and assets within the plan grow tax deferred. Withdrawals taken prior to age 59½ may be subject to penalties unless an exception applies.
Because these plans are defined contribution plans, the ultimate retirement benefit depends on the level of contributions, the length of time assets are invested, and the rate of return achieved over that period. At distribution, withdrawals are taxed as ordinary income.
401(k) Plans
A 401(k) plan is a widely used retirement vehicle that allows employees to make elective salary deferrals while giving employers the option to provide matching or profit-sharing contributions.
401(k) plans offer a high degree of flexibility, including:
- Higher contribution limits compared to SEP and SIMPLE plans
- Optional employer matching or discretionary contributions
- Roth contribution features
- Plan loan and hardship withdrawal provisions, if permitted
While 401(k) plans require ongoing administration and compliance with ERISA reporting standards, they can be designed to support a broad range of workforce and compensation strategies.
Simplified Employee Pension (SEP)
A Simplified Employee Pension (SEP) is straightforward to establish and administer. Under a SEP, each employee establishes their own SEP-IRA, and employer contributions are made directly into those accounts.
Employers are not required to make contributions every year. However, when contributions are made, they must be allocated to all eligible employees—generally those over age 21, including part-time employees—using a uniform percentage of compensation, up to 25% of covered compensation¹.
Employees manage their own SEP-IRAs and may invest in mutual funds, money market funds, or fixed investment options. All contributions are 100% vested immediately, allowing employees full access to their funds, subject to early withdrawal penalties. Employees may also contribute separately to a Traditional or Roth IRA, subject to income limitations.
From the employer’s perspective, administrative responsibilities are minimal. Contributions are made by the business’s tax filing deadline, with no ongoing account management or forfeiture provisions to oversee.
SIMPLE IRA Plans
A SIMPLE IRA allows employees to establish their own IRA and make voluntary, tax-deductible contributions through salary deferrals. Employees who earn at least $5,000 in any two prior years and the current year are eligible to participate.
Employee contributions are limited to $11,500 or 100% of compensation, whichever is less², and all contributions are immediately vested.
Withdrawals before age 59½ are generally subject to a 10% penalty. If a withdrawal occurs within the first two years of participation, the penalty increases to 25%, unless an exception applies.
Employers are required to contribute under one of the following formulas:
- A dollar-for-dollar match on employee deferrals up to 3% of compensation, or
- A 2% non-elective contribution for all eligible employees, regardless of whether they participate³
SIMPLE 401(k) Plans
A SIMPLE 401(k) is structured similarly to a SIMPLE IRA but operates under 401(k) rules. This version allows employers to establish more restrictive eligibility requirements, which may reduce overall employer contribution obligations.
However, SIMPLE 401(k) plans are subject to ERISA compliance and reporting requirements, similar to traditional 401(k) plans, making them more complex and costly to administer than SIMPLE IRAs.
Selecting the Appropriate Retirement Plan
Choosing the right retirement plan involves balancing employee benefits, tax considerations, and administrative responsibilities. Each plan type offers distinct advantages, and the optimal choice depends on organizational goals and long-term planning objectives.
We work with businesses to evaluate retirement plan options and design strategies that align with both employer priorities and employee financial well-being.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material. |
¹,²,³ Contribution limits and requirements are subject to IRS rules and periodic updates.
