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How to Help Your Small Business Employees Save for Retirement

Ben is a fantastic manager at your restaurant. Your customers compliment your amazing service and you know it’s because of his work. Recently, he’s asked about retirement savings. You can’t imagine there’s enough room in the budget to offer a 401k plan. You start to worry. What if your amazing employee leaves to work somewhere with better benefits?

This is an all-too-common situation for small business owners. But, there are options that don’t require a small business to invest in a 401k plan. One of them is offering an employer sponsored Individual Retirement Annuity (IRA). There are two options for these annuity retirement plans: a Simplified Employee Pension (SEP) IRA and a Savings Incentive Matching Plan for Employees (SIMPLE) IRA.

Individual Retirement Annuity: A way to save money for retirement using an annuity rather than an investment stock.

There are advantages and things to consider when utilizing an employer sponsored annuity retirement plan:


  • Tax-deferred growth
  • An employee’s funds are held in their own fixed annuity. Each annuity has a minimum guaranteed interest rate
  • Low maintenance and less paperwork to get started
  • Employees are 100% vested immediately
  • Employer contributions are 100% tax-deductible for the employer
  • Offering a retirement plan is a great way to increase employee retention
  • No administrative fees for the employer

Things to Consider:

  • Distributions are considered income and are subject to income tax
  • No loan or hardship provisions. For example, if you want to take money from your account to buy a house there will be an IRS penalty if you are under the age 59 ½
  • Eligibility requirements may be limiting
Two people standing in a cow kennel while one person is holding a clipboard.

The Simplified Employee Pension (SEP) IRA Plan

A SEP IRA is a great option for small, sales based businesses, sole proprietors and self-employed individuals. Examples of these may include farmers and small businesses such as insurance agencies. The employer, or proprietor, has the flexibility to contribute to the plan only when they can. So, if your business goes through yearly highs and lows this may be a good option.

SEP IRA: A retirement plan designed for small businesses. Contributions are not mandatory and are made by the employer only. The employer must offer the same contribution percentage for each employee.

This type of retirement plan functions more like a profit sharing plan. The employer, or sole proprietor, puts in the set percentage of contributions only if they had a good year. They don’t have to contribute to the plan every year. Contributions are not due until the tax filing due date, making this a useful tax planning tool.

Employees can make traditional IRA contributions into their SEP IRA. Employees often choose to do this because it is an easy way to manage two types of contributions under one policy. If an employee leaves the company, their SEP IRA will follow them. They can continue to make traditional IRA contributions to their SEP IRA.

So, overall, the benefits of the SEP IRA Retirement Plan include:

  • Flexible, discretionary contributions with no requirement to make ongoing contributions
  • The plan can be discontinued at any time
  • Employee is 100% vested immediately
  • Available to sole proprietors and self-employed individuals

SIMPLE IRA Retirement Plan for Small Business

The SIMPLE IRA may be a good fit for more established small businesses. If your business has less than 100 employees, and has had steady growth for many years, this may be a good option. The SIMPLE IRA plan requires the employer to contribute funds every year.

A person is standing outside carrying a box with items, inflated balloons and a piece of paper that reads happy retirement.
SIMPLE IRA: A retirement plan designed for small business. Employers and employees make contributions based on annual compensation and matching contributions. The Employer must match the same percentage for each employee.

A SIMPLE IRA functions more like a 401k plan. In this plan, there are stipulations on how much the employer needs to contribute. An employer has two options for contributing to their employee’s SIMPLE IRA:

1. Match each employee’s contributions. The employer can choose to match their employees’ contributions up to three percent of each employee’s compensation. The employer must always match at least one percent. But, three out of every five years the employer must match three percent.

2. Contribute two percent of each employee’s annual compensation. Meaning, if an employee is eligible they will receive two percent of their compensation every year. Employees are still eligible to contribute.

Overall, the benefits of the SIMPLE IRA Plan include:

  • Employee is 100% vested immediately
  • Matching contributions encourage employees to plan for their retirement
  • Employers can choose the contribution method they prefer
  • Employees can contribute on a pre-tax basis

Setting up either plan is simple. They typically involve less paperwork than other retirement plans. To start your employer-sponsored Individual Retirement Annuity (IRA) contact your local, independent insurance agent.

Published 1/17/20


*Products referenced may not be approved/available in all states. Limitations and conditions may apply. Premium will be based on benefits chosen and policy rates available at time of application.

Disclaimer: This article is not expert advice. The analysis of coverage is in general terms and is superseded in all respects by the Insuring Agreements, Endorsements, Exclusions, Terms and Conditions of the Policy. Some of the coverage mentioned in this material may not be applicable in all states or may have to be modified to conform to applicable state law. Some coverages may have been eliminated or modified since the publishing of this material. Discounts may not be available in all states. Limitations and conditions may apply. Premiums will be based on benefits chosen. Please check with your local Independent Auto-Owners Insurance Agent for details."


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