SEP's
What makes a SEP Plan simple?
Must all employees participate?
How are SEP contributions made?
What are the tax benefits of a SEP?
Do SEP plans allow employee deferrals?
Does SEP Plan Participation affect IRA contributions?
When must a SEP Plan be established and funded?
SEPs Truly Simplified Retirement Plans

SEP plans fill a basic employer need. Employers establish retirement plans for very basic reasons. First, the employer may want to provide retirement benefits for him or herself. Second, offering a retirement plan may serve to reward and retain quality employees. And third, a retirement plan may help attract competent new employees to the business. If any of these motivations apply to you, and if the idea of a plan that is extremely simple to establish and operate attracts you, then the simplified employee pension -- better known as "SEP" -- may be the plan for you.
What makes a SEP Plan simple?

SEP plans deliver on the promise of simplicity. A SEP plan eliminates:

  • virtually all of the administrative complexity found in many retirement plans,
  • lengthy and detailed government reporting,
  • numerous nondiscrimination testing, and
  • complicated, restrictive contribution formulas associated with many retirement plans.
Must all employees participate?

Generally, all employees are eligible, though the employer may exclude:

  • employees under age 21 (or the employer may select a lower age),
  • employees who have not worked in (up to) three of the prior five years,
  • certain union or nonresident alien employees, and
  • employees not earning the minimum annual amount (indexed at $400 for 1997).
(Employees meeting the plan's eligibility requirements may not choose to be excluded from a SEP plan, and an employer must contribute for them.)
How are SEP contributions made?

In addition to providing a means to save for retirement, SEP plans also can provide immediate tax benefits, because:

  • SEP plan contributions for the business owner and employees are tax deductible,
  • amounts contributed remain tax-deferred, as do their earnings, until withdrawn, and
  • withdrawals (distributions) are taxed as ordinary income under the Traditional IRA rules.
What Are The Tax Benefits of A SEP ?

In addition to providing a means to save for retirement, SEP plans also can provide immediate tax benefits, because:

  • SEP plan contributions for the business owner and employees are tax deductible,
  • amounts contributed remain tax-deferred, as do their earnings, until withdrawn, and
  • withdrawals (distributions) are taxed as ordinary income under the Traditional IRA rules.
Do SEP Plans allow employee deferrals?
Some SEP plans allow employee salary deferrals, which means that employees elect to have some compensation withheld and contributed to the plan. But such deferrals are only permitted in certain SEP plans that were properly established by December 31, 1996. SEP plans opened after that time do not allow employee deferrals. (A new kind of plan known as a SIMPLE plan does allow employee salary deferrals.)
Does SEP Plan participation affect IRA contributions?
Employees who participate in a SEP plan are considered "active participants" in an employer retirement plan. As such, the deductibility of their IRA contribution may or may not be affected, depending on their income. SEP plan participation does not, however, reduce or eliminate an employee's ability to fund an IRA, and all IRA earnings are tax-deferred, regardless of SEP plan participation. But more important, an SEP plan offers the advantage of a contribution which is potentially much larger than an IRA contribution.
When must a SEP Plan be established and funded?

A SEP plan may be set up and funded at any time prior to the business's tax return due date, plus extensions.

Members of: National Association of Securities Dealers (FINRA), S.I.P.C.
Securities Industry Association (S.I.A.)
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