Simplified Employee Pensions for Small Businesses
Tax benefits make SEP plans a popular choice
Pensions. It seemed like not long ago they were as much a part of company life as conversations by company watercoolers. But times sure have changed. Over the years, private companies have increasingly found pension plans too complex and expensive compared to 401(k) retirement plans, making companies that still offer pensions rare. Even in the public sector, where pension plans were an ironclad part of benefits programs, municipalities with strapped budgets are struggling with how to meet their short- and long-term pension obligations.
According to U.S. News & World Report, "The number of employers providing pensions continues to decline every year. Many companies are now prohibiting new employees from joining the pension plan, and some companies are even freezing new accruals for existing workers."
What exactly is a pension plan?
Simply put, a pension plan is a type of retirement plan, usually tax exempt, whereby an employer contributes money to a pooled fund that is set aside as a future retirement benefit for employees.
A simple pension plan for very small businesses
While pension plans have increasingly disappeared with large companies, they continue to be a smart choice for smaller businesses or, in particular, businesses with five or fewer employees. For these types of businesses, a pension plan provides a valuable opportunity to reduce taxes while offering an important benefit for employees.
One type of popular pension plan offered today is the simplified employee pension plan, or SEP. According to the Department of Labor, "SEPs are relatively uncomplicated retirement savings vehicles. A SEP allows employers to make contributions on a tax-favored basis to individual retirement accounts (IRAs) owned by the employees. SEPs are subject to minimal reporting and disclosure requirements. Under a SEP, the employee must set up an IRA to accept the employer's contributions. As a general rule, the employer can contribute up to 25 percent of the employee's pay into a SEP each year, up to a maximum of $40,000."
Benefits of SEPs
SEPs have become popular with small businesses for many reasons. Some of the advantages of having one include:
- Tax benefits. Contributions to a SEP are tax deductible, and your business pays no taxes on the earnings on the investments.
- Contribution flexibility. You are not locked into making contributions every year. In fact, you decide each year whether, and how much, to contribute to your employees' SEP-IRAs. This is in direct contrast to other types of pension plans, which require employers to make contributions each year.
- No administrative burden. Generally, you do not have to file any documents with the government.
- Low administrative costs. Plus, you may be eligible for a tax credit of up to $500 per year for each of the first three years, which helps to defray the cost of starting the plan.
We can help you meet your retirement goals
For more information on simplified employee pension plans or other retirement plans available to you and your employees, stop by or give us a call.