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Simplified Employee Pensions
A simplified employee pension plan (SEP) provides the employer with a simple method of establishing a retirement plan for himself and his employees. Each plan participant establishes a SEP IRA into which the employer makes contributions.
For more information visit www.irs.gov.
Why Offer a SEP IRA?
- Contributions made by the employer are deductible on the employer’s tax return.
- The employer can establish and fund the SEP plan until his tax filing deadline with extensions.
- SEP plans do not have a continuity requirement. An employer can fund a SEP plan for one year with no obligation to fund the plan in subsequent years.
- Allocation of contributions can be flexible but not discriminatory. No 5500 reporting.
- Fiduciary responsibilities are limited. Contributions are made to the participant’s IRA account. The participant directs the investment of the funds and is not taxed on contributions until distributed.
- A SEP is a particularly attractive alternative when the owner is the only participant.
Eligibility
Employer Eligibility
Eligible employers include corporations, partnerships, non-profit organizations, “S” corporations, and sole proprietors (self employed).
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SEP Contributions
Employer Contributions
The employer contribution to a SEP account must be based on a written allocation formula, and must not discriminate in favor of the highly compensated employees. Three contribution allocation formulas are allowable:
- A uniform dollar amount for all employees.
- A uniform percentage of compensation (not to exceed 25%) for all employees.
- A fixed dollar amount allocated in the ratio that the employee’s compensation bears to total plan compensation.
For purposes of making contributions to a SEP account, compensation (including elective deferrals) is limited to $230,000 for 2008, (subject to COLA’s in future years.)
The maximum contribution is the smaller of $46,000 in 2008 ($49,000 in 2009) or 25% of the participant’s compensation. For common law employees, compensation is considered to be W-2 wages. For self-employed individuals, compensation is earned income.
The employer may change the contribution formula from year to year, or may make no contribution at all for a given year. If the employer does change the contribution allocation formula, however, he must execute a new plan adoption agreement and notify all eligible employees.
Employee Contributions
Since the employee's account is an IRA account, the employee may contribute up to the annual IRA contribution limit as a normal IRA contribution. Participation in a SEP plan is considered “active participation” and may affect the deductibility of a regular IRA contribution.
SEP Distributions
Distributions from a SEP account follow all of the rules for distributions from a Traditional IRA, except that a participant who is still working and receiving compensation when he attains the age of 70½ may continue to make employer contributions to his SEP account. The employee is still subject to the required minimum distribution rules.
Deductibility limits can be confusing and tax laws are frequently changing. It is always best to review your specific situation and/or circumstances with a qualified tax advisor.