Tags: Retirement | SEP plans | retirement

What Are SEP Plans?

By    |   Friday, 21 August 2015 03:34 PM

A Simplified Employee Pension, or SEP, plan is a retirement savings plan for people who are self-employed or small business owners. Contributions are made to SEP plans by the employer only. No employee contributions are allowed. Employer contributions are 100 percent vested immediately, according to Raymond James.

One reason for choosing a SEP plan is the contribution level allowed is significantly higher than traditional or Roth IRA plans, according to New Direction IRA. In 2015, business owners can contribute the lesser of up to 25 percent of income or $53,000.

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According to the IRS, other advantages of SEP plans for retirement
  • Contributions to a SEP are tax deductible.
  • SEPs do not require the business to file the SEP activity with the government.
  • Sole proprietors, partnerships, and corporations can set up SEP plans.
  • The administrative and maintenance costs of a SEP are very low.

The business is not required to make contributions every year. SEPs allow the business to decide if a contribution will be made that year and, if so, the amount of the contribution. This makes the SEP a good alternative to a traditional profit-sharing plan.

To participate in a SEP plan, an employee must be age 21, must have worked for the company in three of the last five years, and must have been paid at least $550 in compensation during the year, according to Raymond James. Each employee establishes his or her own account so they control how the money will be invested. The employer’s responsibilities, and liabilities, for the investments are limited to making timely deposits into the accounts.

The IRS explained that the easiest way to set up the SEP is for the employer to partner with a financial institution that offers retirement plans and select the IRS model of the SEP. The employer completes an IRS Form 5305-SEP. By the tax-filing deadline of the year, a contribution is to be made. A copy of the 5305-SEP form must be provided to each employee and is the legal document regarding the plan administration. The financial institution becomes a trustee of the plan and agrees to provide employer contribution information to each participant, and to receive and invest the contributions.

Each employee notifies the employer of his or her SEP IRA information and the business contributes into the employee’s IRA each year. The company determines if a contribution will be made to the retirement plan. Employers with SEP plans are not required to file annual plan returns, unlike those with qualified retirement plans.

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A Simplified Employee Pension, or SEP, plan is a retirement savings plan for people who are self-employed or small business owners.
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Friday, 21 August 2015 03:34 PM
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