Establish and Contribute to SEP or SIMPLE IRAs in September

September and October are significant months for small business owners who make employer contributions to retirement plans for themselves or their employees. If you filed for a tax extension, your return is now due, and your employer contributions must be made by the extension date.

You need to decide:

• If or how much of an employer contribution to make to an existing SEP IRA or SIMPLE IRA
• Whether and when to establish a new SEP or a SIMPLE for your small business

Tax Filing Deadlines

This table shows the tax return due dates for each type of tax filing entity.

Making the Right Employer Contributions

SEP IRAs

Because employer contributions to SEP IRAs are discretionary, you must decide each year whether to contribute. This is an ideal time to think about making an employer contribution and reducing your tax liability for 2014. You can even establish a brand new SEP IRA for last year if you do it no later than your extension deadline, October 15.  

The employer contributions for SEP plans and Individual 401(k) plans share the same limit: a maximum of 25 percent of an employee’s compensation, not to exceed $53,000 (2015).

SIMPLE IRAs

The employer matching contribution or non-elective contribution to a SIMPLE IRA is mandatory. If you don’t make those contributions for 2014 by the deadline, you will have to go through the IRS correction program later on. It’s far better to plan ahead and meet the deadline.

For the SIMPLE IRA, the employer matching contribution is a dollar-for-dollar match of how much compensation an employee deferred, up to 3 percent of the employee’s compensation. If you chose not to link your contribution to your employees’ deferral contributions, you must make a non-elective, profit-sharing contribution equal to 2 percent of the employee’s compensation. Keep in mind the type of employer contribution was provided through a notice to the participants before the beginning of the plan year and cannot be changed.

Establishing a New SIMPLE IRA Plan for Employees

Looking forward to your 2015 tax return, it’s not too late to establish a SIMPLE IRA plan for your employees. You can establish a SIMPLE IRA if you have fewer than 100 employees. Its salary deferral features allow employees to contribute to their account, an attractive feature for many employers.

SIMPLE IRA plans require employer contributions. Most small business owners choose a matching contribution. This means you contribute only to the accounts of employees who make their own contributions by deferring compensation. If you choose a non-elective contribution, you must contribute to all eligible employees, whether or not they defer compensation.

Small business owners need to think about SIMPLE IRAs now because the IRS requires employers to give employees at least three months to make their contributions to a newly established plan. Because SIMPLE IRA plans operate on a calendar year, they must be established by October 1. This is called a “short plan year.”

Typically the SIMPLE IRA document must be signed by the employer and the IRA custodian by October 1^st to be valid plan for the calendar year.

If you form a new business after October 1 and want to establish a SIMPLE IRA plan, the IRS requires you to do that as soon as “administratively feasible.”

IRS Publication 560 explains more about all types of small business retirement plans, or contact one of our trained professionals at The Entrust Group.