Simplified Employee Pension (SEP)
A SEP is a retirement plan for most small businesses with one or more employees including sole proprietorships (you as the owner count as an employee) and small business owners; partnerships can also have one.
Only employer contributions are allowed to a SEP IRA. As the employer, you determine what percentage of each employee’s pay to contribute to the plan subject to IRS limits. The limit for 2023 is the lesser of 25% of pay or $66,000 (contribution amounts are indexed annually for inflation). You must cover all employees who are at least 21 years old and have worked for you 3 of the last 5 years. All contributions are 100% vested.
SEPs are easy to set up and have low operating costs, plus there aren’t any governmental filing requirements. And you can decide whether to contribute to any given year depending on varying business conditions.
A SIMPLE IRA plan is another savings option available for small business owners with fewer than 100 employees.
A SIMPLE IRA plan allows employees to contribute a percentage of their pay each pay period, up to $15,500 in 2023, with an option to make additional catch-up contributions of $3,500 in 2023 if the employee is age 55 or older (contribution amounts are indexed annually for inflation). Contributions are made via payroll deduction. You as the employer are required to either match 100% of employee contributions up to 3% of their pay or make a fixed contribution of 2% of pay for all eligible employees, even for those who choose not to participate in the plan. You must cover all employees who have earned at least $5,000 in any of the prior 2 years and are expected to earn that amount in the current year. All contributions are 100% vested.
SIMPLE IRA plans are easy to set up and administer; many banks and financial institutions can handle the paperwork and contributions. And there aren’t any annual governmental reports to file.
Solo 401(k) Plan
401(k) plans are widely accepted as savings vehicle for retirement savings across the U.S.
Did you know there’s a Solo 401(k) that’s designed just for sole proprietors or business owners with no employees except a spouse? A plan that can also be used by C-corporation and S-corporation business owners.
The good news is that you get all the tax benefits of having a qualified plan plus you get to make contributions as both the employee and employer. As the employee you can contribute up to $22,500 in 2023, with an added $7,500 available in catch-up contributions if you’re age 50 or older. Plus, as the employer, you can contribute up to 25% of your pay (there’s a different formula if you’re self-employed) to a maximum of $66,000. Contribution amounts are indexed annually for inflation.
Solo 401(k) plans are difficult to set up and administer, but they offer you the ability to accumulate large amounts of savings.
Multiple Employer Plan (MEP)
A MEP is a pooled plan covering the employees of employers that share a common interest or industry. It’s sponsored by a single entity who is responsible for selecting plan design and investment options.
Employers who adopt a MEP frequently do so to limit their fiduciary liability, their fiduciary liability limited to selecting and monitoring the MEP sponsor. The MEP sponsor also takes on most of the legal responsibilities related to the MEP. In addition, only one Form 5500 needs to be filed, and only one audit performed in case one is needed.
MEPs offer small businesses access to the benefits of a large plan with lower costs due to economies of scale. In return the small business can transfer administrative duties, including plan document preparation and maintenance, to the MEP and gain access to institutionally priced investments. Trade-offs are limited options in plan design features and investments.
Pooled Employer Plan (PEP)
PEPs are the new kid on the block, created by the SECURE Act of 2019.
A PEP is a pooled plan covering the employers that do not share a common interest or industry. They are frequently 401(k) plans.
In many other ways, a PEP is like a MEP. One difference is that a PEP is administered by an independent Pooled Plan Provider (PPP) who ensures there are no conflicts with other service and investment providers.
Cash Balance Plan
A cash balance plan can be a good plan for a small business or professional group that wants to make large contributions toward retirement for business owners and/or key executives aged mid-40s or older.
It’s a hybrid pension plan – part defined benefit plan and part defined contribution plan. The benefit is guaranteed, like defined benefit plan benefits are, but is expressed in terms of a “hypothetical account” that is equal to “pay credits” and “interest credits” earned by a participant that resemble defined contribution contributions and investment returns; the final benefit is generally a cash payment based on the participant’s “hypothetical account.”
The plan is funded solely with employer contributions as determined by an actuary and must be made at least once a year and can vary based on interest rates and market returns. Since cash balance plans must be funded on a regular basis, your company should have consistent profits from year to year and a predictable cash flow.
One of the main attractions of a cash balance plan is that when it’s paired with a 401(k) and/or profit-sharing plan it can provide a substantial benefit. Executives and key employees are limited in what they can contribute to 401(k)/profit-sharing plans ($66,000 in 2023). But add in a cash balance plan and not only could tax-deductible contributions be increased dramatically, but so could tax-deferred retirement benefits.
You must cover all employees 21 years old with 1 year of service; contributions may vest over time.
Cash balance plans are complicated to set up and expensive to administer and fund. Professional administration, actuaries, and consultants are frequently required.