Those small employer plans like SEPs and SIMPLE-IRAs? They’re great starter tools for retirement savings. Think of them like toddler clothes: low maintenance, affordable, and easy to manage. No administration costs, no annual 5500s, and they get the job done—for a while.
But like kids’ clothing, there comes a time when these plans no longer fit. When’s that time? It’s when your business starts growing—specifically, when you add employees who aren’t owners or family. These plans don’t allow for contribution disparity. That means if you want to give yourself a 15% contribution, you’ve got to give the same to your eligible employees. There’s no flexibility. And in a SEP, there are no employee salary deferrals. In a SIMPLE, deferrals are capped and employer contributions are limited. Translation: you’re carrying the full load on funding.
That’s when you know it’s time to graduate to something more robust—like a 401(k) plan or even pairing that with a cash balance plan if your business can support it. Don’t wait until the plan stops working to make the change. Know when the SEP no longer fits—and be ready to upgrade before your business growth turns into a compliance headache.
