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:
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:
As a general rule, up to 15 percent 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:
Advantages for Your Employees
Establishing a SEP
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.
Although using the IRS Form 5305-SEP is an easy way to set up a SEP, you do not have to use this model agreement. Many financial institutions have their own SEP arrangements that have been approved by the Internal Revenue Service. In addition, employers may design their own SEP subject to the legal requirements.
If you use a non-model SEP, the law allows you to take into account Social Security contributions you made for your employees. If you want to do this, consult your professional advisor.
Who Must Be Included in a SEP
Generally, any employee who performs services for certain affiliated or commonly controlled employers (see the discussion on page 6 regarding these terms) must be included in a SEP. However, there are five exceptions to this general rule. Employers may exclude from the SEP:
Financial institutions authorized to hold and invest SEP contributions include banks, savings and loan associations, insurance companies, certain regulated investment companies, federally-insured credit unions and brokerage firms. SEP contributions can be put into stocks, mutual funds, money market funds, savings accounts and other similar types of investments.
You and your employees will receive a statement from the financial institutions investing your SEP contributions both at the time you make the first SEP contributions and at least once a year after that. Each institution must provide a plain-language explanation of any fees and commissions it imposes on SEP assets withdrawn before the expiration of a specified period of time.
Get Legal Help Setting up SEPs for Your Employees
As a business owner, you wear plenty of hats on a day-to-day basis. But, in the interest of making sure your employees have a decent retirement plan, you may decide it's best to work with an expert. Get started by talking to an ERISA attorney experienced with SEPs and other retirement accounts.