2 Alternatives to 401(k) Plans: SIMPLE IRA & SEP Plans for Small Businesses

Choosing a retirement plan for you and your employees can seem daunting. SEP, SIMPLE IRA, 401(k)—how do you know which option is the best fit for you and your team? Investment advisors often recommend businesses create 401(k) accounts for their employees. And 401(k) plans certainly make sense for some businesses. However, there are other options available to small businesses that are neither complicated nor expensive to administer. Here’s a quick comparison to help you understand your options.

  SIMPLE IRA 401(k) SEP
Who Contributes Employees (including owners) can contribute up to $12,500 annually ($15,5000 if over age 50). Employees (including owners) can contribute up to $18,000 annually ($24,000 if over age 50). Employees may not contribute. All funding is paid by employer.
Costs Very low administrative costs. Higher administrative costs to run the plan. Very low administrative costs.
ERISA Requirements No ERISA testing requirements. Requires analysis, including discrimination testing, to assure highly compensated employees and owners are not favored over other employees. No ERISA testing, but established rules for who can and cannot be excluded from a plan.
Employer Match Employer must either match 3% of employees’ income or contribute 2% of employees’ income regardless of whether the employees participate. Very flexible employer matching, vesting, and other contributions to the plans, but subject to certain testing to assure highly compensated employees aren’t favored. Plan is funded exclusively by employer contributions. Employer contributions must be based on a formula available to all eligible employees.
Vesting Employer contributions are immediately vested. Employer contributions can be vested over time. Employer contributions can be vested over time.
Contribution Cap Total annual contributions to the plan are capped at $12,500 ($15,500 if over age 50) plus the employer match. Total annual contributions are capped at $53,000 ($59,000 if over age 50.) Total annual contributions are capped at $53,000.
Withdrawal Penalties Employees are subject to a 25% early withdrawal penalty if withdrawal occurs before age 59 ½. Employees generally cannot withdraw unless separated from the company, but hardship loans against a 401(k) are permitted. Employees are subject to a 10% early withdrawal penalty if withdrawal occurs before 59 ½.

 
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