Introduction

Simplified Employee Pensions, known as SEPs, represent an easy, low-cost retirement plan option for employers. Instead of establishing a separate retirement plan, in a SEP the employer makes contributions to his or her own Individual Retirement Account (IRA) and the IRAs of his or her employees, subject to certain percentages of pay and dollar limits. Employers who establish SEPs can:

• Make tax deductible contributions to their own and their employees' IRAs.
• Omit or reduce contributions in years when contributions are unaffordable.
• Avoid the administrative costs and the reporting requirements of conventional plans.

Whether a SEP is appropriate for your business will depend on factors such as revenue, firm size and the age, compensation and retirement needs of the business owner and work force. You may want to discuss other retirement plan options with a professional advisor.

What Are SEP-IRAs?

SEPs are retirement programs established by you, as an employer, which allow you to provide retirement benefits for yourself and your employees without paying the start-up and operating costs of conventional plans.

SEPs allow an employer to establish and make contributions to IRAs. The two critical differences between SEP-IRAs and other IRAs are that:

• SEP contributions are generally made by employers, not employees.
• The amounts contributed to SEPs can be much larger than the amounts contributed to IRAs.

As a general rule, up to 15 % of each employee's pay, including your own, can be put into a SEP-IRA each year.

Why Set Up a SEP?

Advantages for you as an employer:

• A SEP can provide a significant source of income at retirement.
• Contributions to a SEP are tax deductible and your business pays no taxes on the earnings on a SEP's investments.
• You are not locked into making contributions in future years. You can decide each year whether to pay into the SEP and how much to contribute.
• Once you put money into a SEP you have no further responsibility for the amounts contributed. The funds are managed by a financial institution.
• A SEP can be established and operated without the administrative expenses, consulting fees or commissions usually associated with maintaining a conventional retirement plan.
• You ordinarily do not have to file any documents with the government.
• SEPs can be set up by sole proprietors, partnerships and corporations, including S corporations.
• You can deduct contributions to a SEP for a previous tax year if you make contributions by the due date of the employer's tax return, including any extensions.

Advantages for Your Employees

• The money you contribute to your employees' SEP accounts, as well as the investment earnings, belongs to them, even if they stop working for you.
• Employers' contributions to the SEP-IRA are not included in employees' income for income tax purposes.
• Employees pay no taxes on the amounts in their SEP accounts until they start withdrawing the funds.
• Employees can change the financial institution where their SEP is invested.
• In case of an employee's death, the assets in a SEP will go to someone the employee has chosen.
• SEP contributions can continue until employees retire, but they must start withdrawing assets from a SEP when they reach age 70?.

Establishing a SEP

You can set up a SEP by using the Internal Revenue Service's "Model SEP" agreement Form 5305-SEP. All you have to do is:

• Decide the percentage of pay you want to contribute to the SEP. The contribution is limited to 15% of pay or $24,000* (for 1997), whichever is smaller. A uniform percentage of pay must be contributed for each employee. This number is indexed for inflation each year.
• Fill out Internal Revenue Service Form 5305-SEP, a quarter-page form with six blank spaces. This form is not filed with the Internal Revenue Service.
• Set up an IRA at a financial institution to receive your SEP contributions. An IRA can be set up by or for your employees to receive the contributions you make for them.
• Mail the SEP contributions to the financial institutions.
• Give employees eligible to be included in the SEP a completed copy of the Form 5305-SEP and the other documents and disclosures listed in the instructions, including an annual statement to each participating employee of the amounts contributed to their account for the year.

No other reporting or disclosure ordinarily is required.

You cannot use the IRS "Model SEP" if you currently maintain any type of qualified retirement plan or have ever maintained a pension plan for yourself and your employees that promised to pay specific benefits at retirement -- a "defined benefit" pension plan. You also cannot use the Model SEP if you have any eligible employees for whom accounts have not been established. For this purpose, eligible employees include certain individuals who have a specific relationship to the employer. For example, eligible employees for purposes of SEP contributions include "leased employees", and members of an "affiliated" or "commonly controlled" group of employers of which you are a member. These are technical terms that are defined in the Internal Revenue Code. For example, the term " leased employees" is defined in section 414(n) of the Code. The term, "affiliated group" is defined in Code section 1504, and the term "controlled group" is defined in Code section 1563. If you believe any of these terms apply to you, you should consult a professional advisor.