Tuesday, December 10, 2013
Comparing SEP and SIMPLE Retirement Plans
Thinking about starting a tax-favored retirement plan for your small business or professional practive? If you're looking for a plan that is relatively easy to administer, you may be interested in learning more about the Simplified Employee Pension (SEP) and the SIMPLE (Savings Incentive Match Plan for Employees).
Within limits, contributions to both types of plans are tax deductible. Participants don’t pay income taxes on plan contributions or investment earnings until they receive distributions from the plan.
Any employer or self-employed person can sponsor a SEP.
A SIMPLE plan is available only to employers who had no more than 100 employees in the prior year who earned $5,000 or more.
A newly established SEP must be funded entirely by employer contributions. For 2013, the annual contribution generally can’t exceed $51,000 per participant (or, if less, 25% of compensation).* SEP plans are flexible in that the sponsoring employer doesn’t have to contribute every year.
A SIMPLE can permit employees to contribute salary on a pre-tax basis (like a 401(k) plan). In 2013, the salary deferral limit is $12,000, plus an additional $2,500 catch-up contribution for an employee age 50 or older. An annual employer contribution is mandatory, but there are two options.
the contribution can be a 100% match on the amount an employee contributes, up to 3% of compensation or
the employer can make a contribution equal to 2% of compensation for every eligible employee for eligible employees who earn at least $5,000.
A SEP must cover every employee who is age 21 or over if the employee has worked for the employer in any three of the last five years, regardless of the number of hours worked, and has earned at least $500 from the employer during the year.
All employees who received at least $5,000 in annual compensation from the employer during any two preceding years and can reasonably be expected to earn at least $5,000 in the current year are eligible to participate in a SIMPLE.
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*A special calculation must be made for a self-employed individual. For purposes of this rule, compensation is capped at $255,000 for 2013.