Getting Started

Offering retirement benefits shows you care about your employees’ long-term well-being and financial security. It can also help you attract and retain dedicated employees for the long haul. Many employees appreciate getting support to save for the future, especially because they may find it challenging to have the discipline or funds to do it on their own.

That said, retirement benefits for small farms can be tricky to navigate. The costs of setting up retirement plans, the time involved in managing them, and the legal paperwork can feel overwhelming—especially when you’re already balancing the day-to-day demands of running a farm. But here’s the good news: there are retirement plan options that are flexible and relatively easy to set up, which can even work for small farms with just one or a few employees. And, thanks to tax credits available through the SECURE 2.0 Act, many small farm businesses can receive financial assistance to help with the costs of getting started.

Choosing the right retirement benefit option depends on a few factors: how much you can contribute, how much flexibility your employees need, and how much administrative work you’re willing to take on. Retirement benefits can seem like a big investment, but with a little research and some careful planning, you can offer a meaningful benefit that supports both your farm’s goals and your employees’ long-term financial security.

This guide outlines the basics of four common options for small farm businesses:

1. Simplified Employee Pension (SEP) IRA
2. Savings Incentive Match Plan for Employees (SIMPLE IRA)
3. 401(k), and
4. Payroll deduction IRA

What is a SEP-IRA? A Simplified Employee Pension IRA is a retirement plan that allows employers to make contributions to their employees’ retirement accounts. Only employers contribute to a SEP-IRA—there’s no employee contribution—and the contribution limits are higher than a SIMPLE IRA. SEP-IRAs are easy to administer and flexible, making them an ideal choice for seasonal businesses like farms where income may vary from year to year.

What is a SIMPLE IRA? A Savings Incentive Match Plan for Employees is a retirement plan designed for small businesses with fewer than 100 employees. It allows both employees and employers to contribute, with employers required to match employee contributions up to a certain limit. The SIMPLE IRA is easy to set up and maintain, with minimal administrative costs, making it a great option for farms that want to offer a straightforward retirement benefit without a lot of paperwork.

What is a 401(k)? A 401(k) plan is a more traditional retirement savings option, allowing both employees and employers to contribute to individual retirement accounts. It offers higher contribution limits than other plans and can also include features like matching contributions, vesting schedules, and profit-sharing. A 401(k) plan requires significant administrative work and comes with higher setup costs than the other options. However, it can be a powerful tool if your farm is financially stable and you want to offer a more comprehensive benefits package to attract and retain employees.

What is a payroll deduction IRA? A payroll deduction IRA allows employees to set up their own IRA accounts and have contributions automatically deducted from their paychecks. Unlike other plans, employers don’t contribute to a payroll deduction IRA, but they handle the payroll deductions. This option is flexible, low cost, easy to set up, and requires very little ongoing maintenance from the employer. It’s a great fit for farms with limited administrative resources.

Let’s explore each option in more detail to help you identify the right option for your farm employees.

At-A-Glance-Comparision Chart of Retirement Benefits

Which Option is Right for Your Farm?

Simplified Employee Pension IRA (SEP-IRA)

For small farms that want to offer a retirement benefit without the complexity or administrative burden of a traditional 401(k), a SEP-IRA can be an excellent option.

A SEP-IRA is a retirement plan where the employer makes contributions to individual retirement accounts (IRAs) for eligible employees. Unlike other plans where employees can contribute to their own retirement savings, a SEP-IRA is entirely employer-funded. This means employees don’t have to worry about contributing on their own. This can be a relief for farm employees who are often stretched thin financially. It also makes it a simpler, more streamlined option compared to plans like 401(k)s or SIMPLE IRAs, where both the employer and employees can contribute.

Here’s how it works: You set up the SEP-IRA with a financial institution (such as a bank or brokerage), and employees will have their own individual accounts under the plan. Each year, you decide how much to contribute (up to the annual limit set by the IRS). Contributions are typically a percentage of each employee’s earnings. The contributions are made directly to each employee’s IRA through payroll. The contributions are exempt from payroll taxes, and the income is tax-deferred, meaning employees don’t pay income taxes on it until they withdraw the money in retirement. Contributions are also tax-deductible for the farm, which can help reduce your taxable income for the year.

Key components of a SEP-IRA

●     Employees are eligible for a SEP-IRA if they are 21 or older, have worked for the farm for at least three of the last five years, and have earned at least $750 in the year in which they are eligible for contributions. Employers can set up additional rules for eligibility, but the rules must be based on objective standards and must be applied consistently across all employees (e.g., you can require that only full-time employees are eligible).

●     Only employers contribute to SEP-IRAs. You can contribute up to 25% of each employee’s compensation, with a maximum contribution of $70,000 for 2025. The exact percentage you contribute is up to you, but you must contribute the same percentage for all eligible employees (with a few exceptions). So, for example, if you contribute 10% of one employee’s salary, you must also contribute 10% to every other eligible employee.

●     Employers are not required to make the same or any contributions every year. As the employer, you choose the contribution amount each year. This means that in the farm’s leaner years, you can reduce the contribution or even skip it altogether. This flexibility can make SEP-IRAs appealing to farms with unpredictable income or fluctuations from season to season.

Consider whether your employees would value a SEP-IRA

While a SEP-IRA offers numerous benefits, it’s essential to assess whether your employees would value it. Many employees may not fully appreciate the tax-deferred nature of SEP contributions, especially if they’re more focused on getting paid more now. However, a SEP-IRA can be a powerful long-term benefit that helps employees save for retirement without any immediate cost from their own pocket. After all, the employer makes the contributions.

The contributions made to a SEP-IRA are immediately vested, meaning that once the contributions to an employee’s account are made, that money belongs to the employee right away. Employees can take their SEP-IRA with them if they leave the farm and roll it into another retirement account, like an individual 401(k) or a traditional IRA. Employees who are looking for a low-maintenance retirement option may find this very attractive.

However, if your farm’s employees are accustomed to more hands-on retirement options (like a 401(k) where they can also contribute), they may not place as much value on a SEP-IRA. It’s a good idea to check in with your employees or get a sense of their retirement planning goals to see if this kind of benefit would appeal to them.

Key takeaways

• SEP-IRAs are simple, flexible, and employer-funded.
• Employers can contribute up to 25% of an employee’s compensation, with a maximum contribution of $70,000 for 2025.
• Employees don’t contribute to the plan, and they can take their SEP-IRA with them if they leave the farm.
• The flexibility of SEP-IRAs makes them a great fit for farms with fluctuating incomes.

Reflect to Move Forward

Now that we’ve covered the basic considerations for SEP-IRAs, take a moment to reflect on the following:

• Given your farm budget, long-term goals, and employee needs, how well do you think a SEP-IRA fits your business on a scale of 1 to 3?

○     1: Not a good fit at all, 2: Somewhat of a fit, 3: A great fit!

• How much would your employees value a SEP-IRA on a scale of 1 to 3?

○     1: They’d prefer something else, 2: They might appreciate it, 3: They’d definitely value it!

Understand What It Takes to Offer a SEP-IRA

The financial costs of offering a SEP-IRA come mainly from the contributions you make to your employees’ accounts. You’ll also have to pay some administrative costs.

Here are a few factors to keep in mind:

Contribution amounts: As the employer, you decide how much to contribute each year. The maximum contribution is up to 25% of each employee’s compensation ($70,000 in 2025). You can choose to contribute a lower percentage or nothing at all, depending on how your farm is doing financially in a given year. Keep in mind that the more employees you have, the more you’ll need to contribute overall. While this is an investment in your employees’ future, it’s important to calculate how these contributions will impact your farm’s bottom line.

Administrative costs: SEP-IRAs tend to have lower administrative costs compared to 401(k)s and slightly lower administrative costs than SIMPLE IRAs. You will want to factor in these potential costs when evaluating whether a SEP-IRA fits your budget. Be sure to get a full list of service or administration fees from your provider. It’s a good idea to shop around and compare fees from different providers, as costs can vary widely. Some large providers may offer more services (like online platforms or educational tools), while smaller providers might offer lower fees but with fewer bells and whistles.

Take account of tax benefits

Offering a SEP-IRA comes with several tax advantages, which should be factored into your assessment of overall costs:

• Contributions are tax-deductible costs for employers. The employer contributions are tax-deductible as a business expense, which can help reduce your farm’s taxable income.
• Contributions are exempt from payroll taxes, including Social Security, Medicare, and unemployment taxes. This means that both you, as the employer, and your employees avoid paying payroll taxes on SEP-IRA contributions.
• Tax-deferred growth for employees: Employees don’t pay income taxes on SEP-IRA contributions until they begin to withdraw funds, typically in retirement. This allows the investments to grow without being taxed in the meantime, which can help employees accumulate more savings over time.
• Tax credits under SECURE 2.0: Highlighted at the end of this guide, the SECURE 2.0 Act provides several incentives for small businesses (fewer than 100 employees) to offer their employees retirement plans. Be sure to work with your tax professional to ensure you’re taking full advantage of these credits.

Farm Owner Contributions and Overall Rules

Farm owners can contribute to a SEP-IRA, but how contributions are calculated depends on the farm’s business structure. The key differences are how net earnings and compensation are defined and how contributions are calculated for owners. Here’s a breakdown by business structure:

• As a sole proprietor or single-member LLC taxed as a sole proprietorship, you are considered self-employed (not an employee). Your SEP-IRA contribution is based on your net earnings from self-employment. To calculate your net earnings, you subtract business expenses from total income, then subtract half of your self-employment taxes. You can contribute up to 25% of your net self-employment income, subject to the IRS limit ($70,000 in 2025).
• In partnerships and multi-member LLCs taxed as partnerships, each partner is considered self-employed. The contribution is based on your share of the partnership’s net earnings after subtracting business expenses and your share of self-employment taxes. You can contribute up to 25% of your share of net earnings, up to the IRS limit.
• S corporations and LLCs taxed as S corporations. S corporation owners with more than 2% ownership are considered employees of the business. You must receive W-2 wages to make SEP-IRA contributions. The employer (the S Corp) can contribute up to 25% of the owner’s salary (W-2 wages), up to the IRS limit.
  SEP-IRAs must comply with non-discrimination rules, which require that contributions be made uniformly for all eligible employees. This means the same percentage of compensation must be contributed to all eligible employees’ SEP-IRAs.

For example, if you choose to contribute 3% of an employee’s salary, you must contribute the same 3% to every other eligible employee, regardless of their salary or job level.

There is one exception. Owner-employees or family members (e.g., a spouse or child) can receive a different percentage of contributions. However, this must be clearly documented and reasonable. The IRS doesn’t allow these additional contributions to be used to unfairly disadvantage other employees.

Certain plan documents and notifications are required. SEP-IRAs are considered exempt from the more complex requirements of ERISA (Employee Retirement Income Security Act). These include the requirement for formal plan documents, fiduciary responsibilities, and the annual filing of Form 5500. However, employers must still provide employees with certain notices and disclosures about the SEP-IRA. These typically include:

• A formal SEP-IRA agreement, which is typically a model document provided by the financial institution or SEP-IRA provider you’re working with.
• An annual notice to employees about the plan’s features and contribution amounts.

This brings us to paperwork.

Evaluate the paperwork load

The paperwork load for a SEP-IRA is generally minimal compared to other retirement plans like 401(k)s, but there are still some key tasks you need to manage. Below is a breakdown of the main paperwork and filing requirements for offering a SEP-IRA.

Set up the SEP-IRA plan: The first step in setting up a SEP-IRA is to choose a financial institution (e.g., a bank or investment firm) to administer the plan. You’ll need to sign a SEP-IRA agreement (usually provided by the financial institution) that outlines the details of the plan, such as eligibility requirements, contribution percentages, and how the plan will be managed. This is typically a one-time process, though you’ll want to keep a copy of the agreement for future reference.

Make annual contribution decisions: Each year, you must decide how much to contribute to your employees’ accounts, if anything. Although there is no set minimum contribution, you need to make sure that all eligible employees receive the same percentage of compensation. While no IRS filing is required specifically for your SEP-IRA contributions, you will need to maintain accurate records of these decisions.

Tax reporting for SEP-IRA contributions to employees. The tax reporting of SEP-IRA contributions is relatively straightforward. The financial institution managing the SEP-IRA will file Form 5498 to report the total contributions made to each employee’s account. This form is filed by the financial institution (not the employer) and will be sent to the employee and the IRS.

As the employer, you don’t need to report SEP-IRA contributions on your employees’ Form W-2 since the contributions are tax-deferred and are not considered part of the employee’s taxable income in the year the contributions are made.

Savings Incentive Match Plan for Employees (SIMPLE IRA)

If you’re looking for a straightforward retirement plan that offers both employer and employee contributions, a SIMPLE IRA might be the right fit for your farm.

SIMPLE IRAs allow both employees and employers to contribute to the retirement accounts, unlike SEP-IRAs, which are employer-only funded. This gives employees more control over their retirement savings while allowing the employer to provide an additional benefit.

Here’s how it works: You set up the SIMPLE IRA through a financial institution (such as a bank or investment firm) and give eligible employees their own individual accounts. Employees may also set up their own SIMPLE IRA with the provider of their choosing. Each year, employees elect to contribute a portion of their salary to their SIMPLE IRA—up to the annual contribution limit set by the IRS. Employers must also contribute, either through a matching contribution or a fixed contribution.

At the end of each month, the employer sends the withheld income and matching contributions to the account holder. If employees set up their own SIMPLE IRA, they provide the employer with instructions, including the name to which the check is made out and the mailing address or other necessary documentation. There are penalties for not putting the funds into the employee’s SIMPLE IRA on a timely basis, so make sure you have systems in place to get the money in within 30 days of the close of the month when it was withheld.

Employee contributions are made through payroll deductions, and they are tax-deferred—meaning employees don’t pay income taxes on the contributions until they withdraw the funds in retirement. Employer contributions are also tax-deductible and are not subject to payroll taxes.

Key components of a SIMPLE IRA

SIMPLE IRAs are a flexible and relatively easy-to-administer option, but there are a few important details to know:

Eligibility: Employees who have earned at least $5,000 in any two preceding years and are expected to earn at least $5,000 in the current year are eligible to participate in the SIMPLE IRA. This sounds complicated, but it can be simple. Employees are eligible if you’ve paid them at least $5,000, even if that income was earned up to two years ago. You also need to expect they’ll continue earning at least $5,000 more with you over the next year.

Contribution limits: At the time of this writing (2025), employees can contribute up to $16,500 to their SIMPLE IRA. Employees aged 50 and older are allowed an additional $3,500 catch-up contribution. Be sure to research the most up-to-date limits.

Employer flexibility with contributions. Employers have some flexibility in choosing how to contribute to their employees’ SIMPLE IRAs. They can select one of the following options for the entire year:

1. 3% matching contribution: Employers match employee contributions dollar-for-dollar, up to 3% of each employee’s compensation. If you choose this option, you can lower your match to 1% in up to two years within a five-year period. The employer’s contribution can’t be lower than 1%.
2. 2% non-elective contribution: The employer contributes 2% of each eligible employee’s compensation, regardless of whether the employee contributes to the plan.

For example, if an employee earns $50,000, the maximum matching contribution from the employer would be $1,500 (3% of $50,000). If the employer chooses the non-elective contribution option, the employer would contribute $1,000 (2% of $50,000) even if the employee doesn’t make any salary deferrals.

Once you select one of these options, you must apply it to all eligible employees for the entire year. You have the flexibility to change the contribution method annually, but you must stick to your choice for the full year once it’s made. For example, if you offer a 3% match one year, you could choose the 2% non-elective contribution the following year, or vice versa. You cannot suspend the contribution entirely unless the farm business is facing extreme financial hardship.

Employer contributions are immediately vested. This means employees have full ownership of the funds once they are deposited. This is a key advantage of SIMPLE IRAs for employees, as they don’t have to wait to “earn” the employer’s contributions.

Consider whether your employees would value a SIMPLE IRA

SIMPLE IRAs offer a unique balance of employer contributions and employee control, which can be appealing to many employees. The tax-deferred growth of both employer and employee contributions can help employees accumulate savings for retirement. However, it’s important to assess whether your employees would truly value a SIMPLE IRA.

SIMPLE IRAs are most attractive when employees are really interested in long-term retirement planning, especially given they get the employer’s contributions in addition to their own. Yet, if they prioritize short-term wages, this benefit might not be as compelling.

It’s worth considering how you communicate the value of this benefit to your employees. Offering a SIMPLE IRA can be a clear way to show your commitment to their financial well-being by helping them build their retirement savings.

Key takeaways

• SIMPLE IRAs are easy to set up and administer with minimal paperwork.
• Both employees and employers can contribute, allowing employees to build their own retirement savings with tax-deferred contributions.
• Employers are required to contribute either matching contributions (up to 3%) or non-elective contributions (2%) of employee salaries.
• Employer contributions are immediately vested, meaning employees own the money as soon as it’s deposited.
• Employee contributions are tax-deferred, and they can contribute a significant amount each year (up to $16,500 in 2025, (with a $3,500 catch-up contribution for those 50+).

Reflect to Move Forward

Now that we’ve covered the basic considerations for SIMPLE IRAs, take a moment to reflect on the following:

• Given your farm budget, long-term goals, and employee needs, how well do you think a SIMPLE IRA fits your business on a scale of 1 to 3?

○     1: Not a good fit at all, 2: Somewhat of a fit, 3: A great fit!

How much would your employees value a SIMPLE IRA on a scale of 1 to 3?

○     1: They’d prefer something else, 2: They might appreciate it, 3: They’d definitely value it!

Understand What It Takes to Offer a SIMPLE IRA

The financial costs of offering a SIMPLE IRA are mostly from the contributions you make to your employees’ accounts. You will also need to pay the administrative fees charged by the financial institution you choose (if you set up the SIMPLE IRA). If the employee sets it up, the business does not pay any administrative fees aside from staff time to prepare and send in the monthly contribution. Here are the key factors to consider:

Contribution amounts: As the employer, you are required to make either a matching contribution (up to 3% of each employee’s compensation) or a non-elective contribution (2% of each eligible employee’s compensation). You can choose either method each year, but once you make a selection, it must apply to all eligible employees for that year. If you choose the matching contribution, you can reduce your match to 1% of each employee’s compensation, but only for up to three years within a five-year period. Even with the reduced match, you are still required to meet the minimum contribution requirement for all eligible employees. Of course, the more employees you have, the higher your total contributions will be.

• Example: If your employee earns $50,000, the maximum matching contribution you could make would be $1,500 (3% of $50,000), assuming the employee contributes at least that much themselves. If you choose the non-elective contribution method, you would contribute $1,000 (2% of $50,000) regardless of whether the employee contributes any of their own funds to the plan. If you have five eligible employees all making the same amount, the total matching contribution would be $7,500, and the total non-elective contribution would be $5,000.

Administrative costs: SIMPLE IRAs tend to have lower administrative costs compared to more complex plans like 401(k)s, but a bit higher compared to SEP-IRAs. If you are setting up the SIMPLE IRA for your employees, be sure to discuss with the provider their full list of fees and service charges related to administration. If your employees are setting up their own SIMPLE IRA, they should be diligent in selecting a service provider that works for them.

Take account of tax benefits

Offering a SIMPLE IRA comes with several tax advantages, which are important to factor into your assessment of overall costs:

Contributions are tax-deductible for employers: Employer contributions are tax-deductible as a business expense. This can help reduce your farm’s taxable income.

Contributions are exempt from payroll taxes, including Social Security, Medicare, and unemployment taxes. This means that both you, as the employer, and your employees avoid paying payroll taxes on SIMPLE IRA contributions.

Tax-deferred growth for employees: Contributions to the SIMPLE IRA grow tax-deferred, meaning that employees don’t pay income taxes on their contributions until they withdraw the funds during retirement. This allows the contributions to compound over time without the deduction of annual taxes.

You can receive tax credits under the SECURE 2.0 Act: Highlighted at the end of this guide, the SECURE 2.0 Act introduced several incentives for small businesses (fewer than 100 employees) to offer their employees retirement plans like SIMPLE IRAs. Be sure to work with your tax professional to ensure you’re taking full advantage of these credits.

Farm Owner Contributions and Additional Rules

Farm owners can contribute to a SIMPLE IRA, but how contributions are calculated depends on the farm’s business structure. All business owners can contribute both as the employer and as the employee (in different ways depending on the business structure) to maximize their retirement savings and enjoy tax benefits. Here’s a quick summary of how this works for different business structures.

• Sole proprietorships and partnerships (self-employed). Sole proprietors and partners do not need to be W-2 employees to contribute to a SIMPLE IRA. Instead, they make contributions based on their net earnings from self-employment. This allows them to contribute both as the employer and as the employee, even though they aren’t technically “employees” of the business.

○     Employer contribution: The business owner can make a 2% non-elective contribution based on their net earnings from the business.

○     Employee contribution: The owner can also make employee salary deferrals up to the annual limit (e.g., $16,500 for 2025, plus catch-up contributions if 50 or older).

○     Example: Let’s say you’re a sole proprietor with $50,000 in net business income. You can contribute 2% of $50,000 as a non-elective employer contribution (i.e., $1,000). You can also contribute up to the employee deferral limit (e.g., $16,500 for 2025, plus catch-up if applicable).

• S corporations and C corporations (W-2 wages required). If your farm business is taxed as an S Corporation or C Corporation (including an LLC taxed as an S Corp or C Corp), and you own more than 2% of the company, you must be on payroll (receiving W-2 wages) to make employee salary deferrals to your SIMPLE IRA. This ensures that contributions are tied directly to W-2 wages, which are subject to payroll taxes.

Example. Let’s say you’re a more than 2% owner of an S corporation or C corporation (or an LLC taxed as either), and you earn $50,000 in W-2 wages from the business. The business can contribute up to 2% non-elective (i.e., $1,000) or up to 3% matching (i.e., $1,500) of your W-2 wages. You can also make employee salary deferrals (up to $16,500 for 2025, plus catch-up contributions if 50 or older) from your W-2 wages.

Although SIMPLE IRAs are more straightforward than traditional retirement plans, they still have important legal requirements that you need to follow. Here are the key legal considerations when offering a SIMPLE IRA.

Once you offer a SIMPLE IRA, you must choose one method—matching contributions or non-elective contributions—and apply it to all eligible employees. Whether employer contributions are mandatory depends on which method you choose:

Matching contributions are only required if the eligible employee opts in. If the employer offers a SIMPLE IRA with matching contributions (say 2%), and the employee is eligible but opts not to make any employee contributions, the employer does not have to make any contributions.

• Reason: With matching contributions, the employer only contributes based on the employee’s own contributions. If the employee doesn’t contribute to the plan, there’s nothing for the employer to match.

Non-elective contributions are required even if the eligible employee decides not to make contributions. If the employer offers a SIMPLE IRA with non-elective contributions (2% of the employee’s compensation), the employer must still make the 2% non-elective contribution, even if the employee chooses not to make any contributions.

• Reason: Non-elective contributions are required regardless of whether the employee makes elective deferrals. This contribution is a set amount the employer provides as long as the employee is eligible for the plan.

You cannot impose stricter eligibility rules than those set by the IRS. In other words, you cannot impose a stricter “full-time only” rule that would exclude eligible part-time employees who meet the income requirements.

You must stay within contribution limits set by the IRS: For 2025, employees can contribute up to $16,500 to their SIMPLE IRA (with an additional $3,500 catch-up contribution for employees aged 50 or older). Employers can contribute up to 3% of each employee’s salary if they choose the matching contribution method or 2% if they opt for the non-elective contribution method.

SIMPLE IRAs must adhere to non-discrimination rules. This means that if you decide to contribute to employees’ SIMPLE IRAs, you must contribute the same percentage of salary to all eligible employees. You cannot make differential contributions based on role, salary, or ownership status. The employer contribution cannot be higher for owners or family members. This is different from SEP-IRAs, where there is some flexibility for owner-employees and family members (if documented properly). The contribution rules are designed to ensure equal treatment for all eligible employees, regardless of family relationships or ownership status.

Certain plan documents and notices are required: SIMPLE IRAs are considered exempt from ERISA’s more complex requirements, such as the requirement for formal plan documents, fiduciary responsibilities, and the annual filing of Form 5500. However, employers must still provide employees with certain notices and disclosures about the SIMPLE IRA, including:

• A summary plan description (SPD)
• An annual notice about the plan’s features and contribution limits

This brings us to paperwork.

Evaluate the paperwork load

While SIMPLE IRAs are relatively low-maintenance compared to other retirement plans like 401(k)s, there are still some paperwork requirements you need to manage. Here’s what’s involved in setting up and maintaining a SIMPLE IRA:

Set up the plan: The first step is choosing a financial institution (bank, brokerage, etc.) to administer the plan. You’ll need to complete a SIMPLE IRA Plan Adoption Agreement that outlines the eligibility rules, contribution percentages, and how the plan will be managed. This is usually a one-time task, but be sure to keep a copy for your records. Alternatively, your employees can set up their own SIMPLE IRA with the bank or financial institution of their choice.

Make annual contribution decisions: Each year, you will need to decide how much to contribute to the plan. There are no filing requirements for the contributions, but you must ensure that all eligible employees receive the same contribution percentage. Accurate recordkeeping is crucial to avoid exceeding contribution limits.

Provide notifications to your employees: You are required to inform eligible employees about the SIMPLE IRA plan, including eligibility requirements, the contribution structure (whether it’s matching or non-elective), and any changes to the plan. Though there’s no federal requirement to provide detailed documents, it’s good practice to share a summary so employees understand how to benefit from the plan.

Tax Reporting: Similar to SEP-IRAs, the financial institution managing the SIMPLE IRA will file Form 5498 to report the total contributions made to each employee’s SIMPLE IRA account, including both employer contributions (whether matching or non-elective) and employee salary deferrals. Form 5498 is filed by the financial institution, not the employer.

401(k) Retirement Plans

If you’re looking for a more robust retirement plan with increased opportunities for both employer and employee contributions, a 401(k) plan might be a good fit for your farm.

401(k) plans come with more administrative responsibilities than SIMPLE IRAs and SEP-IRAs, but they also offer greater flexibility and higher contribution limits. Employers can choose to match employee contributions or make discretionary profit-sharing contributions, offering flexibility in how they support their staff’s retirement.

Key components of a 401(k) plan

Here are some important details to understand about 401(k) plans:

Eligibility. Employees must be at least 21 years old and have worked for the farm for at least one year, depending on the employer’s plan rules. You can also set eligibility criteria, such as a certain number of hours worked.

Contribution limits. In 2025, employees can contribute up to $22,500 to their 401(k) (the limit increases to $30,000 for those 50 and older, with the $7,500 catch-up contribution). This is significantly higher than the contribution limit for SIMPLE IRAs. This makes 401(k)s a better option for employees looking to maximize their retirement savings.

Employer’s flexibility in 401(k) contributions. Employers can choose to make two types of contributions to employees’ 401(k) plans:

1. Matching contributions: Employers match employee contributions up to a certain percentage of salary (e.g., 100% match on the first 3% of salary, 50% match on the next 2%, etc.). This is the most common employer contribution structure.
2. Profit-sharing contributions: Employers can also make profit-sharing contributions, where the employer contributes a percentage of profits to employee accounts, regardless of whether the employee contributes.

Vesting. Employer contributions to a 401(k) plan may be subject to a vesting schedule, meaning that employees may not fully own employer contributions until they have worked for a certain number of years (e.g., 3–5 years). This is an important consideration if you want to encourage long-term retention with your farm employees.

Loans and hardship withdrawals. 401(k) plans allow employees to take loans from their accounts (up to certain limits) or make withdrawals in cases of financial hardship.

Consider whether your employees would value a 401(k)

If your employees are looking for a comprehensive retirement benefit, a 401(k) plan can offer substantial value. Your employees may value the opportunity to contribute a higher percentage of their salary to their retirement savings and appreciate the potential for employer matching or profit-sharing contributions. If your employees are more interested in immediate compensation than long-term savings, a 401(k) might not be as compelling. It’s worth asking your farm employee about their goals for retirement savings to determine whether a 401(k) plan is the best choice.

Key takeaways

• 401(k) plans allow for higher employee contributions (up to $22,500 in 2025, plus $7,500 catch-up contributions for those 50+).
• Employers can contribute either through matching contributions or profit-sharing contributions.
• Employer contributions may be subject to a vesting schedule.
• 401(k) plans are more complex and require more administrative work than SIMPLE IRAs, but they offer greater flexibility and higher contribution limits.
• Employees have the option to take loans or hardship withdrawals from their 401(k) accounts.

Reflect to Move Forward

Now that we’ve covered the basic considerations for 401(k) Retirement Plans, take a moment to reflect on the following:

• Given your farm budget, long-term goals, and employee needs, how well do you think a 401(k) Retirement Plan fits your business on a scale of 1 to 3?

○     1: Not a good fit at all, 2: Somewhat of a fit, 3: A great fit!

• How much would your employees value a 401(k) Retirement Plan on a scale of 1 to 3?

○     1: They’d prefer something else, 2: They might appreciate it, 3: They’d definitely value it!

Understand What It Takes to Offer a 401(k)

The financial costs of offering a 401(k) plan include both the contributions you make to your employees’ retirement accounts and the administrative fees associated with managing the plan. These costs can vary based on the level of employee participation, the contribution method you choose, and the complexity of the plan itself. Here are the key factors to consider:

Contribution amounts. As the employer, you have flexibility in choosing the amount you contribute to employees’ 401(k) accounts. Typically, employer contributions are in the form of matching contributions or profit-sharing contributions:

• Matching contributions: Many employers offer a matching contribution, where the employer matches a percentage of the employee’s salary deferrals. For example, you might match 100% of the first 3% of salary contributed or 50% of the next 2%. The total match will depend on your plan’s specific rules.
• Profit-sharing contributions: Some employers choose to make discretionary profit-sharing contributions, where a percentage of the company’s profits is allocated to employee accounts, regardless of whether the employee contributes.

Your total contributions will depend on how many employees participate and how much they contribute. If you choose to make a match, the cost will be directly tied to the employee contributions. If you offer profit-sharing, the cost will vary based on the farm’s profitability and what percentage you allocate to the 401(k) plan.

• Administrative costs. 401(k) plans generally have higher administrative costs compared to SIMPLE IRAs. Here’s a breakdown of what to expect from a 401(k):
• Setup fees: These fees typically range from $500 to $2,000.
• Annual administration fees: Expect to pay anywhere from $1,000 to $3,000 annually for plan administration.
• Investment fees: Investment management fees (expense ratios) can range from 0.05% to 1.5% annually, depending on the type of investments offered in the plan.
• Recordkeeping fees: These fees typically range from $50 to $150 per employee annually, though some providers may offer flat fees for recordkeeping.
• Transaction fees: Many 401(k) plans have fees for trading investments, such as mutual funds or ETFs. These fees typically range from $5 to $25 per transaction.
• Service fees: $10 to $25 (for specific services like statement requests or plan changes).

It’s important to shop around and compare providers to find the plan that fits your farm’s needs and budget. Larger providers may offer more services, such as online platforms or investment education tools, but these features come with higher fees. Smaller providers might offer lower fees but fewer services.

Take account of tax benefits

Offering a 401(k) plan comes with several valuable tax advantages that can help offset the costs:

Employer contributions are tax-deductible as a business expense, helping reduce your farm’s taxable income. This includes contributions you make for employee accounts, whether in matching or profit-sharing contributions.

Employer contributions are exempt from payroll taxes (Social Security, Medicare, and unemployment taxes), saving both the employer and employees on these taxes.

Employee contributions grow tax-deferred, meaning they won’t pay taxes until they withdraw the funds in retirement, allowing savings to compound over time.

Tax credits under SECURE 2.0 are available for 401(k)s. As covered at the end of this guide, businesses are eligible for tax credits for contributions under specific circumstances. Check with your tax professional to ensure you are maximizing your credits under this law.

Be mindful of legal implications

Although 401(k)s offer great benefits, they come with important legal requirements. Here are the key considerations:

Employer contributions are mandatory for eligible employees. Once you offer a 401(k), you must contribute to all eligible employees. You can choose between matching contributions or profit-sharing contributions, but the same contribution percentage must apply to all eligible employees, regardless of role or salary. Contributions cannot be higher for owners or family members.

To be eligible for a 401(k), employees must meet minimum requirements. For employees to receive employer contributions, they must be at least 21 years old and have worked at least 1,000 hours per year. For employers with fewer than 100 employees, employees (typically) must also have worked for at least one year to be eligible to participate in the 401(k).

Business owners must receive W-2 wages to participate in the 401(k). Here’s a breakdown of the allowable 401(k) contributions for business owners:

• Employer contributions: Based on compensation (up to 25% of W-2 wages for the employer contribution).
• Employee salary deferrals: Up to the IRS annual limit ($22,500 in 2025, plus a $7,500 catch-up for those 50+).

401(k)s must adhere to non-discrimination rules. Contributions must be the same percentage of compensation for all eligible employees. For example, you cannot contribute more to higher-paid employees or owners. The rules ensure fairness in contribution distribution, regardless of ownership or family status.

ERISA (Employee Retirement Income Security Act) applies to all 401(k) plans, regardless of business size. This means that even if your farm business has fewer than 100 employees, you must still comply with ERISA’s fiduciary responsibilities, including ensuring the plan is managed in the best interest of your employees. Here’s a breakdown of what is required for small businesses:

• Filings: For 401(k) plans with fewer than 100 participants, you are required to file a Form 5500-SF (short form). This is a simplified version of the standard Form 5500, designed to reduce the filing burden for small businesses.
• Fiduciary responsibilities: All 401(k) plans must have fiduciaries who are responsible for managing the plan and acting in the best interest of participants. While this requirement applies to all plans, small businesses may have more flexibility in selecting their fiduciaries and handling plan management.
• Summary Plan Document (SPD): ERISA requires that all 401(k) plans have a Summary Plan Document (SPD) that outlines the plan’s details, including eligibility, contributions, and participant rights. The SPD must be distributed to plan participants within 90 days of their eligibility. While small plans may have a simpler SPD, it’s still essential to comply with this requirement.
• Annual participant disclosures: ERISA requires that 401(k) plan participants receive annual disclosures about plan fees, investment options, and any changes in plan features. Although the disclosure requirements are consistent for all plan sizes, smaller plans may have fewer complexities in what they need to report.
• Audit requirement: Generally, 401(k) plans with fewer than 100 participants are exempt from the annual audit requirement. This is a key advantage for small businesses, as audits can be costly and time-consuming.

Evaluate the paperwork load

While 401(k)s offer more flexibility and potential for higher contributions than SIMPLE IRAs, they come with a more substantial paperwork load. Here’s an overview of the key paperwork requirements involved in setting up and maintaining a 401(k):

You’ll need to review and sign paperwork to set up the 401(k) plan. The first step is choosing a financial institution or third-party administrator (TPA) to handle the plan. You’ll need to complete a 401(k) Plan Adoption Agreement, which outlines the plan’s rules, contribution methods (e.g., employee deferrals, employer matching), eligibility criteria, and vesting schedules. This is typically a one-time task, but the agreement needs to be kept for your records and updated if the plan is amended.

Each year, you must decide how much to contribute to the plan. This includes setting up employer matches (if applicable) and ensuring that employee salary deferrals don’t exceed the annual contribution limit. You’ll need to track these contributions carefully for compliance with IRS rules. There are no filing requirements for employer contributions, but keeping detailed records is essential to avoid exceeding limits.

401(k) plans require more tax reporting than SIMPLE IRAs:

• Form 5500: All 401(k) plans must file an annual Form 5500 with the IRS. For plans with fewer than 100 participants, you’ll file Form 5500-SF (short form), which is simpler. This form must be filed by the plan’s administrator, but as the employer, you are responsible for ensuring it’s done.
• Form 1099-R: If you have any participants who take distributions from the plan, you’ll need to report those on Form 1099-R. Again, the plan administrator typically handles this, but you must provide them with the necessary information.

Employee contributions to the 401(k) plan (also called salary deferrals) are reported on their W-2 forms. These contributions are not subject to income tax, but they reduce employees’ taxable wages for the year and must be reported:

• Employee salary deferrals must be reported in Box 12 of the W-2 using Code D for traditional 401(k) contributions (pre-tax contributions).

Employer contributions (i.e., matching, profit-sharing, or discretionary) are deducted as a business expense on the farm’s tax return. This varies based on your business structure:

• Sole proprietorship: Deducted as part of Schedule C (Profit or Loss from Business) on Form 1040.
• Partnership: Reported on Form 1065, with contributions passing through to Schedule K-1.
• S corporation: Deducted on Form 1120S, and contributions pass through to owners’ Form 1040.

Tax reporting for owner contributions depends on the farm’s business structure. As a business owner, you can contribute to your own 401(k) plan. Here’s how you report them for taxes:

• Sole proprietorship: Owner contributions are reported on Schedule 1 of Form 1040 as adjustments to gross income.
• Partnership: Owner contributions flow through to Schedule K-1, which is included in Form 1040.
• S Corporation & C Corporation: Owner contributions are reported on Form 1040 (via Schedule 1 for salary deferrals, and business returns for employer contributions).

You must provide eligible employees with annual participant disclosures. ERISA requires that 401(k) plan participants receive annual disclosures about the plan’s features, including the fees, investment options, and any changes in the plan. These disclosures help ensure transparency and compliance with the law. Although there are no specific timing requirements beyond the annual disclosure, these must be delivered to participants in a clear and understandable format.

Keep records. It’s crucial to maintain accurate records of all plan activities, including employee eligibility, contributions (both employee deferrals and employer contributions), and any distributions. The IRS does not require a formal annual filing for 401(k)s (other than Form 5500), but your plan administrator will maintain records for IRS audits, and you should ensure all information is available and accurate.

Payroll Deduction IRA

Payroll deduction IRAs are a low-cost option for farm owners who want to offer a retirement benefit but don’t have the time or budget to manage more complex plans like SEP-IRAs, SIMPLE IRAs, or 401(k)s. It’s ideal for farms with a small number of employees or those who want to keep things simple.

A payroll deduction IRA is an individual retirement account (IRA) that employees contribute to directly from their paycheck. Unlike a SEP or SIMPLE IRA, where the employer makes contributions, employees are responsible for contributing their own money. The employer simply facilitates the deductions, making it a convenient, hands-off retirement savings option for the farm.

Key components of a payroll deduction IRA

Employees are responsible for setting up their IRA: Unlike other retirement plans where the employer sets up and manages the account, with a payroll deduction IRA, it is the responsibility of the employee to open and manage their own IRA account. Employees are free to choose the IRA provider of their choice, whether it’s a bank, brokerage, or other financial institution.

As the employer, your primary responsibility is to offer the payroll deduction IRA option to your employees and set up the payroll deduction system. You’ll need to ensure that employee contributions are deducted accurately from their paychecks and sent directly to their chosen IRA providers. This often involves coordinating with your payroll system or provider to handle the automatic deductions and transfers. You are not required to make contributions to the employees’ accounts.

Employees can contribute up to the IRA annual limit set by the IRS ($6,500 for 2025 or $7,500 if they’re 50 or older). These contributions are made on a pre-tax basis, reducing the employee’s taxable income.

There are no fees or costs for the employer to offer a payroll deduction IRA. While employees may pay fees to the financial institution (like investment fees), there’s no ongoing administrative burden for you as the employer.

Employees can change their contribution amount, stop contributions, or even roll over their IRA to another institution. This gives them a lot of flexibility and control over their savings.

Consider whether your employees would value a payroll deduction IRA

Employees are responsible for contributing to a payroll deduction IRA. While some may appreciate the incentive to save a portion of their salary for retirement, others might not value it as much as employer-funded retirement plans. It’s worth checking in with your employees to be sure they understand how it works and if they’d appreciate the option.

Key takeaways

• No employer contributions are required, making it low-cost for the farm business.
• Employees have control over how much they contribute, up to the IRS limit.
• Simple setup with minimal costs and administrative burden.
• Contributions are tax-deferred, which benefits employees in the long run.

Reflect to Move Forward

Now that we’ve covered the basic considerations for Payroll Deduction IRAs, take a moment to reflect on the following:

• Given your farm budget, long-term goals, and employee needs, how well do you think a payroll deduction IRA fits your business on a scale of 1 to 3?

○     1: Not a good fit at all, 2: Somewhat of a fit, 3: A great fit!

• How much would your employees value a payroll deduction IRA on a scale of 1 to 3?

○     1: They’d prefer something else, 2: They might appreciate it, 3: They’d definitely value it!

Understand What It Takes to Offer a Payroll Deduction IRA

The financial costs of offering a payroll deduction IRA are minimal for the employer. There are no setup fees or ongoing administrative costs associated with the plan, making it one of the most cost-effective retirement options. Your only role is to facilitate employee contributions through payroll deductions, which is a simple process that doesn’t require specialized management or external support.

Take account of tax benefits

For employers, there are no direct tax deductions or credits associated with the payroll deduction IRAs, as the contributions are made by employees. For employees, contributions to a payroll deduction IRA are made on a pre-tax basis, lowering their taxable income for the year.

Be mindful of legal implications

While payroll deduction IRAs are one of the simplest retirement options for employers, there are still some key legal considerations to keep in mind.

Here’s what you need to know:

You must follow eligibility requirements & non-discrimination rules: Payroll deduction IRAs do not have complex eligibility rules like other retirement plans (e.g., SEP-IRAs, SIMPLE IRAs, and 401(k)s). Employers do not have to offer the plan to all employees. However, if you choose to offer it to any employee, you must apply the same opportunity to all employees who meet any eligibility criteria you set. For example, if you allow full-time employees to participate but exclude part-time employees, you would need to apply that consistently across your staff. It’s important to be fair and transparent in your approach to avoid any potential claims of discrimination.

As the employer, your responsibility is to facilitate the employee’s contributions via payroll deductions. This typically means setting up a system through your payroll provider or directly through your accounting software to automatically deduct a set amount from the employee’s paycheck and send it to their IRA provider. These contributions are not tied to the employer’s bank account but rather flow from the employee’s paycheck to the financial institution where the employee has opened their IRA account. You will need to ensure that the deductions are accurate and made in a timely manner.

It’s important to have clear communication and documentation: While there is no formal plan document for payroll deduction IRAs, employers should clearly communicate to employees how the deduction process works, the contribution limits, and any administrative details. Employers are also required to provide an annual notice to employees about the availability of the payroll deduction IRA option. Also, they must make sure to track and process contributions correctly.

Payroll deduction IRAs are not subject to complex ERISA requirements like 401(k)s are (e.g., fiduciary responsibilities or filing annual reports), but you still need to be mindful of the basic regulations regarding contributions and eligibility. Missteps in payroll deduction processes could lead to penalties, so it’s important to keep accurate records of each employee’s contributions and ensure they are deposited into their IRA account correctly.

Evaluate the paperwork load

The paperwork load for payroll deduction IRAs is minimal, making it a simple retirement option to manage. As the employer, your primary responsibilities include offering the IRA option to your employees and setting up payroll deductions for those who choose to participate.

Here’s what you’ll need to handle:

Process payroll deductions: You’ll arrange for employee contributions to be deducted directly from their paychecks and sent to their individual IRA accounts. There’s no need for W-2 reporting since these are pre-tax contributions, but it’s important to track the total deductions and ensure they’re correctly sent to the IRA provider.

W-2 reporting is not required: Unlike other retirement plans (like 401(k)s), you don’t need to report employee contributions on their W-2 forms, as contributions are made with pre-tax dollars and don’t impact taxable income.

In general, the administrative load is light, especially compared to more complex plans like 401(k)s. This makes payroll deduction IRAs an easy-to-manage retirement benefit option for small farms.

Take Advantage of SECURE 2.0 Tax Credits When Offering Retirement Benefits

One incentive for small farms to offer retirement benefits is the availability of tax credits through the SECURE 2.0 Act, which was passed in 2022. These credits are designed to incentivize small businesses to support their employees’ retirement savings by helping offset some of the setup costs and employer contributions at the outset. The SECURE 2.0 credits are available to businesses with 100 or fewer employees, which makes most—if not all—small farms eligible. There are three key tax credits to know about:

1. Start-Up Credit. If your farm is setting up a retirement plan for the first time, you could qualify for a start-up credit of up to $5,000 per year for the first three years to cover the costs associated with setting up the plan. This credit helps with the administrative costs of getting the plan off the ground, like setup fees, payroll integration, or financial advising.

2. Employer Contribution Credit. If your farm also contributes to your employees’ retirement plans, you can qualify for an additional contribution credit of up to $1,000 per year for each employee in the first five years of the plan. That’s up to $5,000 for each employee in the five-year period. To qualify, you must offer retirement benefits to at least 50% of all your employees. This includes part-time and seasonal employees.

• Example: Let’s say you have six employees total, two full-time and four seasonal. If your retirement plan says that only full-time employees are eligible to receive retirement benefits, then you would not qualify for this employer contribution credit, as only 33% of your employees are eligible to receive benefits. However, if you have three full-time and three seasonal employees, you could limit the benefit to full-time employees and still receive the contribution credit, as this reaches the 50% eligibility requirement.

3. Automatic Enrollment Credit: Beginning in 2025, small businesses that set up retirement plans with automatic enrollment will be eligible for a new tax credit of $500 per year for up to three years. This credit is available for retirement plans that allow for employee contributions, such as SIMPLE IRAs and 401(k)s. It does not apply to SEP-IRAs, where employees cannot make salary deferrals. To qualify for the credit, the business must implement both automatic enrollment and automatic escalation.

• Automatic enrollment: Employees must be automatically enrolled in the retirement plan at a default contribution rate. This rate can be a fixed percentage of salary, such as 2%.
• Automatic escalation: The employee’s contribution rate must automatically increase by at least 1% per year, up to a maximum of 10%. For example, if the default contribution is set at 2% in Year 1, it would need to increase to 3% in Year 2, 4% in Year 3, and so on, until the employee reaches 10%.

Timeline and applicability of SECURE 2.0 tax credits. The SECURE 2.0 Act tax credits apply starting in the calendar year the retirement plan is established and funded. For example, to qualify for a tax credit in 2025, the farm must establish and fund the retirement plan by December 31, 2025. The farm can then receive the Start-Up Credit and Automatic Enrollment Credit again in 2026 and 2027, and the Employer Contribution Credit in 2026, 2027, 2028, and 2029—as long as the business continues to offer the retirement benefit and meets the eligibility requirements each year.

It generally takes at least six months to plan and set up a retirement plan. Therefore, it’s advisable to begin the process by June to ensure that you can meet the year-end deadline for the tax credit.

With the SECURE 2.0 Act tax credits, setting up a retirement plan may become more accessible and affordable for many small farms. However, keep in mind that these tax credits are only available for employer-sponsored retirement plans—such as SIMPLE IRAs, 401(k)s, and SEP-IRAs (except for the automatic enrollment credit, which applies only to SIMPLE IRAs and 401(k)s). Payroll deduction IRAs do not qualify for the SECURE 2.0 tax credits because they are not considered “employer-sponsored” plans (as the employer does not contribute to the IRA).

Take Action on Retirement Benefits

Now that you’ve considered the options, have you decided on a retirement benefit that would work for your farm business and meet the needs of your employees?

• SEP-IRA
• SIMPLE IRA
• 401(k) Retirement Plan
• Payroll Deduction IRA

If so, that’s wonderful news! However, if the financial strain or administration of providing any of these options feels overwhelming, here are some practical tips for managing those pressures:

1. Understand employee preferences. Not all employees may be ready or able to contribute to a retirement plan, so consider offering options that fit different needs. Some employees may prefer a simple, low-maintenance plan like a SEP-IRA, while others may appreciate the added structure and matching contributions of a 401(k). Ask your employees to assess their interests and tweak your offerings accordingly.

2. Communicate openly and often. Be open about how you plan to offer retirement benefits and your farm’s financial situation—to the extent you feel comfortable. Explaining the benefits, contribution structure, and tax advantages helps employees understand the value of the plan and manage expectations. Regular communication builds trust and helps employees feel valued, even if you can’t provide the maximum benefit every year.

3. Start simple and build up gradually. If offering a comprehensive retirement plan feels like a big commitment, start with a simpler option, like a payroll deduction IRA (simplest), SEP-IRA, or SIMPLE IRA, and build from there as your farm grows. Offering something small and manageable is better than offering nothing at all. As you grow, you can consider increasing contributions or switching to a 401(k) plan with more robust features.

4. Keep accurate records. Once you establish a plan, be diligent about staying in line with all legal and administrative requirements. Accurate recordkeeping is critical to ensure you complete any annual filings or notifications and consistently make contributions.

5. Monitor the plan annually. As your farm’s size, revenue, or employee base grows or changes, your retirement benefits might need adjustments. An annual or periodic review helps ensure you’re providing the optimal benefits without overstretching your resources.

Funder Acknowledgments

This material is based upon work that is supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture, under award number SUB00003520 through the Southern Sustainable Agriculture Research and Education program under subaward number #EDS24-065. USDA is an equal opportunity employer and service provider.