The Tax Code offers several choices for employers looking for simplicity in their retirement plan. Some, like the Safe Harbor and SIMPLE 401(k), have already been discussed.

For maximum simplicity, businessowners may want to consider a plan that uses individual retirement accounts (IRAs) for each plan participant. There are two designs to choose from — the SEP IRA plan and the SIMPLE IRA.

SEP IRA

Small businessowners looking for the most simplicity in their retirement plan will find it in the Simplified Employee Pension plan, or SEP. A SEP is a retirement plan through which an employer makes contributions to IRAs established and maintained for each eligible employee on a non-discriminatory basis.

One major advantage of a SEP is that it can be installed and administered without the administrative expenses associated with other retirement plans. There are no annual government requirements with a SEP. Employer contributions to a SEP IRA can be much larger than the amounts contributed to a Traditional IRA or even SIMPLE IRA (discussed below), but only employer contributions may be made to a SEP.

SEPs will appeal to businessowners who do not want to be obligated to making annual contributions. A SEP operates very much like a profit sharing plan, which means contributions can be increased, decreased, or even skipped from year to year, based on the employer's financial picture.

SEP IRA Key Points:

The employer sets up an IRA for each eligible employee.

Must include part-time employees who earn at least $450 annually and have worked three of past five years.

Allow larger employer contributions than a Traditional or SIMPLE IRA.

Ideal for small businessowners.

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