In a historically tenuous time to retain employees, small employers are particularly at risk. Whereas a large employer might be able to shift duties or promote from within to cover the departure of one or more staff members, small employers are often left high and dry with no one to cover certain shifts or tasks.

One tried-and-true approach to improving employee retention is offering a retirement plan. Doing so can boost morale and engagement — and demonstrate to employees that you care about their long-term well-being. Unfortunately, the start-up and operational costs associated with some conventional retirement plans, such as 401(k)s, could be too onerous to consider right now.

However, there’s one type of retirement plan that’s practically tailor-made for small businesses and other employers with minimal workforces: a Simplified Employee Pension paired with an IRA (SEP-IRA).

Combined concepts

As its name indicates, a SEP-IRA essentially combines the concepts of an employer-provided pension with ownership of an IRA. That is, the employer establishes the plan and makes contributions, but participants own their accounts.

SEP-IRAs particularly suit employers with cash flow issues or that operate in industries that are cyclical by nature. This is because the employer can make larger contributions in good years but reduce those contributions — even down to zero — during down times. Plus, the plan could result in lower tax liability because every dollar contributed reduces taxable income.

How it works

Any business owner or self-employed person can open a SEP-IRA. For organizations with employees, an account is set up for each eligible participant, which is typically someone who:

  • Is at least 21 years old,
  • Has been employed with the organization for three of the last five years, and
  • Has received at least $650 in compensation during the year.

Although employees own their accounts and are always 100% vested, only the employer can make contributions. The contribution rate must be the same for all employees, including the owner, generally up to 25% of a participant’s pay. The contribution limit in 2022 is $61,000.

A SEP-IRA account is a traditional IRA, so it follows the same investment, distribution and rollover rules. Contributions are 100% tax-deductible, and participants don’t get taxed on funds in the account until they make withdrawals.

Within reach

Many small employers might assume that a retirement plan is beyond their reach — especially if they’ve only recently launched their organizations. However, SEP-IRAs are relatively easy to establish and administer. Please contact our firm for further information and help deciding whether one of these plans is right for you.



We highly recommend you confer with your Miller Kaplan advisor to understand your specific situation and how this may impact you.