How to Provide IRAs to Employees

The cost of starting a 401(k) or similar retirement plan for employees can be daunting for small business owners. There are two types of IRAs that employers can provide to up to 100 employees that are cost-effective and easy. The simplified employee pension (SEP) allows employers to contribute money to the IRAs of employees. The simplified incentive match plan for employees (SIMPLE) IRA allows employers to match employee contributions.

Difficulty: Easy

Instructions

Provide SEP IRAs to Your Employees

1. Pick a financial institution with experience in administering SEP IRAs. A SEP IRA trustee makes sure all contributions are properly credited and sends you reports about each year's activity. At tax time, this institution is also responsible for reporting all SEP activity to the IRS.

2. Choose a SEP plan that the trustee uses or the more generic IRS model. This is the document that explains the benefits you will provide to your employees. You can download the IRS SEP model Form 5305 online (see Resources below).

3. Fill out and sign the form outlining the SEP plan you have chosen. This will not become a legal document until you have signed it.

4. Distribute the plan to your eligible employees. To be eligible for a SEP IRA, an employee usually needs to be at least 21 years old and have worked for your company for 3 out of the last 5 years. Check with your plan's administrator for the most updated requirements.

5. Deposit contributions to the SEP IRAs of your employees. Your plan trustee will advise you of due dates and contribution limitations.

Provide SIMPLE IRAs to Your Employees

6. Decide if you want to choose the financial institution that will receive your employee's SIMPLE IRA contributions or if you will leave that decision up to each person. You can set up a SIMPLE IRA either way.

7. Choose a financial institution to use for your contributions to the SIMPLE IRA. This institution should be FDIC-insured and guarantee more than you have invested in case of emergency.

8. Fill out the required paperwork with the IRS. If you have chosen the plan's trustee, use IRS Form 5305-SIMPLE. Use Form 5304-SIMPLE if your employees will pick their own banks.

9. Advise your staff of the plan's requirements, including contribution deadlines and limitations.

10. Make deposits to the SIMPLE IRA when required.

Tips & Warnings

• You can also set up a SEP if you are self-employed, with you as the only employee. The main advantage to using SEP IRAs rather than a traditional or Roth IRA is that the maximum yearly contribution allowed is higher.
• An employee is always 100 percent vested with a SEP or SIMPLE IRA. This means that he can take his money out at any time when he leaves his job. Other retirement plans, such as a 401(k), usually require more years on the job before employees are vested.

Resources

• IRS forms for SEP and SIMPLE IRAs