SEP IRA Plans Build Wealth and Win Talent for Small Businesses

SEP IRA Plans Build Wealth and Win Talent for Small Businesses

By: Josh Huseman, Vice President, Business Owner Advisory Services

In an increasingly competitive talent marketplace, retirement benefits can be a crucial differentiator when it comes to attracting and retaining employees. A recent survey revealed that a staggering 76% of employees consider retirement benefits essential when choosing a new job, and 71% claim they would be more likely to stay with their current employer if offered better retirement options.

While traditional 401(k) plans are the staple of corporate retirement offerings, these plans can be costly to manage and come with restrictions that don’t always fit the operational structure of a small business. As a result, an increasing number of smaller companies are recognizing the potential advantages of the Simplified Employee Pension (SEP) IRA.

A SEP IRA provides greater flexibility and is less cumbersome than its 401(k) counterpart, making it a strong alternative for employers eager to attract and retain top talent. It is also a great option for business owners who want to save for their own retirement.

What Is a SEP IRA and Who Should Consider One?

In simple terms, a SEP IRA is a retirement savings plan specifically designed with small business owners and self-employed individuals in mind. It allows owners to make tax-advantaged contributions to their employees’ retirement accounts, as well as their own, with a fair degree of flexibility and a lower administration burden than a traditional 401(k) plan.

SEP IRAs also come with higher limits, meaning business owners can grow retirement savings faster. In 2023, annual contributions up to 25% of business revenue are permitted as long as owners don’t overstep the $66,000 annual maximum. In contrast, some 401(k) plans limit owner contributions if too few employees participate or decline to fund their own accounts.

Simplified Employee Pension IRA plans are best for sole proprietors and companies with a small staff because the business owner must establish a SEP account for each employee and contribute to those accounts at the same rate as they do their own.

In other words, if you own a business and are funding your account at 8%, you must also contribute 8% of the employee’s compensation into an account established in the employee’s name. All SEP retirement funds, whether created for the owner or the employee, are funded solely by the business. Employees are not permitted to invest income in a SEP IRA.

Despite the cost of making employee contributions, these plans offer a recruiting advantage to small businesses, particularly in industries where salaries may not encourage retirement saving. Access to a retirement nest egg with no out-of-pocket expenses can work in favor of a company when it comes to attracting skilled talent.

Benefits of Establishing a SEP IRA

When it comes to retirement plans, the SEP IRA emerges as a standout choice for many businesses. They offer a host of benefits that cater to employers and employees, including:

• Diversification: Often, business owners plan to fund their retirement through the eventual sale of the company. A SEP allows the owner to hedge against potential uncertainty by building financial assets outside of the business.
• Tax Advantages: Similar to a 401(k), owners set aside contributions from pre-tax dollars, reducing today’s tax burden. Since taxes won’t be paid until the owner withdraws the money, presumably not until retirement, it’s possible to pay taxes at a lower rate.
• Flexibility: Since contributions are discretionary, owners can mitigate variability in cash flow from one year to the next. When business income is lower, contributions can be scaled back accordingly.
• Cost Effectiveness: 401(k) plans can be expensive to administer, but the simplified nature of SEP plans provides an economical approach to enhancing employee benefits.

Considering these benefits, SEP IRAs emerge not only as a tool for building the owner’s financial assets outside of the business, but also as a strategic move to elevate a company's position in the competitive landscape of talent acquisition and retention.

About the Author

Josh is the Vice President of Business Owner Advisory Services. Josh is motivated by a strong desire to see business owners impact the world through their core values and entrepreneurial spirit. He is particularly intrigued by the unique opportunities and challenges that come with family-owned businesses, and he works hard to help them realize their full potential.