Retirement Plans for Small Businesses

I read your Retirement Plans for Self-Employed Workers column about SEPs and solo 401(k)s. Who should consider a SIMPLE, and what are the contribution limits?

A SIMPLE (Savings Incentive Match Plan for Employees of Small Employers) is a retirement-savings account for small businesses. It’s designed for companies with fewer than 100 employees. If you’re self-employed, an SEP or a solo 401(k) is generally your best option. But if you own a business with employees and want them to be able to contribute to their accounts, too, a SIMPLE can work well.

“I think the ideal group for a SIMPLE is a profitable start-up company with several employees,” says Scott Bishop, a CPA and certified financial planner with STA Wealth Management in Houston. Bishop says that a SIMPLE is easy to set up and requires little paperwork. The plans are administered by many brokerage firms and mutual fund companies.

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Employees can contribute up to $12,000 pretax to a SIMPLE in 2014; those who are 50 and older can contribute an extra $2,500. Employers can either match the employees’ contributions (up to 3% of their compensation) or contribute up to 2% of compensation for all employees, whether or not they participate in the plan. (You can’t have a solo 401(k) if you have employees other than a spouse, and with an SEP, only the employer can make the contributions for employees.)

Employers who would like to set up a SIMPLE need to act quickly -- you must establish the account by October 1. For more details, see the IRS’s SIMPLE IRA Plan FAQs and SIMPLE IRA Plans for Small Businesses, as well as the Department of Labor’s SIMPLE IRA Plans for Small Businesses. For information about all kinds of retirement plans for self-employed people and small businesses, see Do-It-Yourself Retirement Plans.