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How to Establish an IRA for Your Employees

Jennifer Dunn

Jennifer Dunn

Contributor at Fundera
Jennifer Dunn is a small business contributor for Fundera and owner of Social Street Media. She is also the community manager at GoDaddy Online Bookkeeping, and her long-standing life goal is to learn something new every day.
Jennifer Dunn

Most people are familiar with the individual retirement account (IRA) and may have already set one up for themselves through their financial institution.

But if you don’t have a retirement plan set in place for your small business’s employees, you probably have a lot of questions about which route you should take.

If you’re an employer and you want to take care of your employees—good for you!—what kind of IRA should you put in place? Here’s what you need to know about what kind of IRAs are available for small business employees, and how you can set them up.

The Different Kinds of IRAs Available

First let’s go over the types of IRA’s that an employer can set up for their employee:

  • Simplified Employee Pension plan or SEP – A SEP plan can be set up by an employer, who will contribute to an IRA for their employees. The size of the company doesn’t matter.
  • SIMPLE IRA plan or Savings Incentive Match Plan for Employees – The SIMPLE IRA plans allows both employers and employees to contribute to an IRA. This is available to any small business that has 100 or fewer employees.


Let’s look at the SEP plan in a little more detail. A SEP plan is a good thing if your business is cyclical in nature, meaning that you have high and low volume times because you, as an employer, can reduce the amount of the contribution. Again, the employer is the only one that contributes in a SEP-IRA.

It’s also easy to start up a SEP plan for your employees; it comes down to three basic steps.

First, you put in place a formal written agreement by filling out and signing one of the following 3 documents: the 5035-SEP (Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement), an IRS-approved prototype SEP (offered by banks, insurance companies, and other financial institutions), or an individually designed SEP plan document. The most common document used to secure an SEP-IRA for your employees is the 5035-SEP. Be sure to follow all instructions on the form to set up the IRAs for your employees.

Next, you’ll need to share all the information about the SEP with all eligible employees—that’s a must. Say you use the 5035-SEP form as the formal agreement for the SEP-IRA. You’ll need to provide an additional employee copy of the form and any related instructions that eligible employees should have.

Finally, you’ll need to set up the SEP-IRA plans for each eligible employee with a bank, insurance company, or other qualified institution. Once the SEP-IRA is set up with the given financial institution, the employee fully owns the SEP-IRA—you’ll just contribute to it.

Setting up an SEP-IRA is easy. But some other need-to-know facts about the SEP plan that you should be aware of include:

  • There is no filing requirement for the employer.
  • Each employee has ownership of all money in the SEP-IRA, meaning that they are 100% vested.
  • This plan has low administrative costs, because it is an easy start-up.
  • You must contribute equally for all employees and you can contribute up to 25% of each employee’s pay.
  • As an employer, you cannot have any other retirement plan for your employees besides another SEP-IRA.


Now let’s examine the SIMPLE-IRA plan more closely.

SIMPLE-IRA plans are also easily established by filling out a form. The forms are either the 5304-SIMPLE, the 5305-SIMPLE, a SIMPLE-IRA prototype, or an individually drafted document. You’ll have to consult a financial advisor to learn more about the forms and to make the right decision for your company.

A SIMPLE-IRA is specifically designated for a company with 100 or fewer employees. Both employees and employers contribute to the IRA. The employer is required to contribute each year, either matching up to 3% of the given employee’s compensation, or a 2% non-elective contribution for each eligible employee. Under the non-elective contribution, the employee must contribute 2% of the eligible employee’s compensation—even if the employee doesn’t contribute to their own SIMPLE-IRA plan that year themselves.

Other facts to know about the SIMPLE-IRA include:

  • The employer cannot have another retirement plan for your employees.
  • Each employee has 100% ownership over money in a SIMPLE-IRA.
  • No filing required for the employer.

The Bottom Line on IRAs

To make the best decision for both your business and your employees, it comes down to knowing the differences between the various IRAs available.

The major differences between the SEP plan and the SIMPLE-IRA include:

  • The SEP plan allows for a flexible contribution percentage, while the SIMPLE doesn’t.
  • In a SIMPLE-IRA, both employer and employee contribute. In a SEP plan, only the employer contributes.
  • The SEP plan is for a business of any size, while the SIMPLE-IRA is for a business with 100 or fewer employees.

Again, we want to stress the importance of talking to a financial professional in order to make the retirement plan decision that is right for you and your employees.

Good luck!


Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.
Jennifer Dunn

Jennifer Dunn

Contributor at Fundera
Jennifer Dunn is a small business contributor for Fundera and owner of Social Street Media. She is also the community manager at GoDaddy Online Bookkeeping, and her long-standing life goal is to learn something new every day.
Jennifer Dunn

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