Exploring SEP and SIMPLE IRA Plans: Tax-Advantaged Retirement Solutions for Small Businesses

If you’re a business owner considering a retirement plan for yourself and your employees, you might be weighing the benefits against concerns about cost, complexity, and compliance. Fortunately, the IRS offers two tax-efficient, low-administrative burden options designed with small employers in mind: the Simplified Employee Pension (SEP) and the Savings Incentive Match Plan for Employees (SIMPLE).

Let’s walk through the key features, compliance considerations, and tax advantages of each plan. Making an informed decision from both a business and tax planning standpoint is logical and strategic, ensuring your retirement plan supports long-term growth while maximizing tax efficiency.

SEP IRAs: Flexible, Employer-Driven Contributions

A SEP IRA is a retirement plan that allows employers to make discretionary contributions to employee IRAs (including their own) with minimal reporting and recordkeeping.

From a tax standpoint:

• Employer contributions are fully deductible as a business expense.

• Employees do not recognize income at the time contributions are made – instead, amounts are taxed upon distribution (typically in retirement).

• Investment earnings grow tax deferred.

In 2025, the maximum employer contribution to an employee's SEP IRA is the lesser of:

1) 25% of the employee’s compensation, or 2) $70,000 (indexed annually for inflation).

Less Administrative Work

You can establish a SEP by adopting IRS Form 5305-SEP, a model plan that does not require IRS filing. The simplicity of paperwork makes SEPs ideal for sole proprietors, partnerships, and small corporations looking to avoid the complexities of traditional qualified plans.

Key Compliance Considerations

• A SEP must cover all eligible employees (generally, those 21 or older who earn at least $750 in 2025 and have worked for you in at least three out of the last five years).

• Contributions must be uniformly applied meaning favoring highly compensated employees can’t happen.

• There are no annual IRS filings or actuarial requirements, and plan assets are held in employee-owned IRAs — reducing fiduciary risk and administrative overhead.

SIMPLE IRAs: Employee Participation with Employer Matching

For small businesses with 100 or fewer employees, a SIMPLE IRA offers a streamlined, cost-effective retirement solution that encourages both employer and employee contributions. Below are key SIMPLE IRA features.

• Funded through employee salary deferrals and mandatory employer contributions (either dollar-for-dollar matching up to 3% of compensation or a 2% non-elective contribution for all eligible employees).

• For 2025, employees can defer up to $16,500, plus an additional $3,500 if they are age 50 or older.

  
  

Key Compliance Considerations

• SIMPLE plans are exempt from nondiscrimination testing (a major advantage over traditional 401(k)s).

• Employers are not required to file Form 5500 or conduct annual actuarial valuations.

• Like SEPs, plan assets are held in individual IRAs, and the investment choices remain under employee control.

  
  

SIMPLE 401(k) Alternative

If you prefer the 401(k) framework but want to avoid complex testing, a SIMPLE 401(k) plan may be best. It combines the features of a SIMPLE IRA with some administrative elements of a 401(k), including mandatory plan documentation and certain notice requirements, while retaining the testing exemption.

Bottom Line: Tax-Efficient, Low-Burden Retirement Options

For business owners seeking retirement benefits without the complexity and expense of traditional pension or profit-sharing plans, SEP and SIMPLE plans offer highly attractive alternatives. Each allows for tax-deductible contributions, tax-deferred growth, and significantly reduced compliance burdens — making them ideal tools for long-term retirement and tax planning.

Next Steps

If you're evaluating which plan best suits your business structure, cash flow, and long-term goals, we’d be happy to walk you through a customized analysis. Contact us to review your eligibility and discuss how SEP or SIMPLE strategies can align with your broader financial and tax planning objectives.