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How to Establish an IRA for Your Employees

Most people are familiar with the individual retirement account (IRA) and may have already set one up for themselves through their financial institution. But you’re an employer and you want to take care of your employees (good for you!) and want to set up an IRA that either you contribute to or both you and the employee contribute to, what do you need to do?

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; you just need to fill out this form, the 5035-SEP. Be sure to follow all instructions on the form to set up the IRAs for your employees. Other facts about the SEP plan 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, or an individually drafted document. Please consult a financial advisor to learn more about the forms and to make the right decision for your company. A SIMPLE-IRA is for a company with 100 or fewer employees. Both employees and employers contribute to the IRA. Other facts about the SIMPLE-IRA include:

  • There are two ways that an employer can contribute:
    • They can do a matching contribution of up to 3% of compensation.
    • Or if the employee chooses not to participate, they can do a 2% non-elective contribution. Even if the employee doesn’t contribute, an employer must do a 2% contribution.
  • 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.

In Summary: The 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.



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