SEP's
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What makes a
SEP Plan simple?
Must all employees participate?
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
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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.
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What
makes a SEP Plan simple?
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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 any retirement plans.
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Must
all employees participate?
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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.) |
What
Are The Tax Benefits of A SEP ?
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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withdrawn, and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.
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Do
SEP Plans allow employee deferrals?
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| 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?
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| 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?
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A
SEP plan may be set up and funded at any time prior to the
business's tax return due date, plus extensions.
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