Lewes CPA
officeProgar & Company, P.A.
Certified Public Accounting services for businesses and individuals
Simplified employee pensions (SEPs) (MS Word)
Simplified employee pensions (SEPs) (.pdf)
Simplified employee pensions (SEPs)
Dear Reader:
As you mentioned, you are thinking about setting up a retirement
plan for yourself and your employees, but are concerned about the
financial commitment and administrative burdens involved in
providing a traditional pension or profit-sharing plan. An
alternative program you may want to consider is a “simplified
employee pension,” or SEP.
SEPs are intended as an alternative to “qualified” retirement plans,
particularly for small businesses like yours. The relative ease of
administration and the complete discretion you, as the employer, are
permitted in deciding whether or not to make annual contributions,
are features that are especially attractive. Here's how these plans
work.
If you don't already have a qualified retirement plan, you can set
up a SEP simply by using the IRS model SEP, Form 5305-SEP. By
adopting this model SEP, which doesn't have to be filed with the
IRS, you will have satisfied the SEP requirements. This means that
you, as the employer, will get a current income tax deduction for
contributions you make on behalf of your employees. Your employees
will be taxed not when the contributions are made, but at a later
date when distributions are made, usually at retirement. Depending
on your specific needs, an individually-designed SEP—instead of the
model SEP—may be appropriate.
When you set up a SEP for yourself and your employees, you will make
these deductible contributions to each employee's IRA, called a
SEP-IRA, which must be IRS-approved. The maximum amount of
deductible contributions that you can make to an employee's SEP-IRA,
and that he or she can exclude from income, is the lesser of: (i) 25
percent of compensation, and (ii) $49,000 (for 2009). The deduction
for your contributions to employees' SEP-IRAs isn't limited by the
deduction ceiling applicable to an individual's own contribution to
a regular IRA. Your employees control their individual IRAs and IRA
investments, the earnings on which are tax-free.
There are other requirements which you have to meet to be eligible
to set up a SEP. Essentially, all regular employees must elect to
participate in the program, and contributions can't discriminate in
favor of the highly compensated employees. But these requirements
are minor compared to the bookkeeping and other administrative
burdens connected with traditional qualified pension and
profit-sharing plans. The detailed records that traditional plans
must maintain to comply with the complex nondiscrimination
regulations aren't required for SEPs. And employers aren't required
to file annual reports with IRS—Forms 5500—which, for a pension
plan, could require the services of an actuary. What record-keeping
is required can be done by a trustee of the SEP-IRAs—usually a bank
or mutual fund.
Another option for a business with 100 or fewer employees is a
“savings incentive match plan for employees” (i.e., a “simple”
plan). Under a simple plan, a “simple IRA” is established for each
eligible employee, with the employer making matching contributions
based on contributions elected by participating employees under a
qualified salary reduction arrangement. The simple plan is subject
to much less stringent requirements than traditional qualified
retirement plans. Or, an employer can adopt a “simple” 401(k) plan,
with similar features to a simple plan, and automatic passage of the
otherwise complex nondiscrimination test for 401(k) plans.
I would be happy to meet with you to explain these options in
greater detail or to discuss any other aspect of your retirement
planning.