Simplified Employee Pension (SEP) Plan
A simplified employee pension (SEP) plan allows employers to contribute toward the retirement of employees without the administrative headaches of qualified retirement plans. - Employer contributions are made to an IRA established for each participating employee with an insurance company, bank or other financial institution.
- Employees may also contribute to their SEP-IRA up to the annual contribution limit for IRAs.
SEP plans offer the usual tax advantages of qualified retirement plans: - Employer contributions to SEP-IRAs for employees are tax-deductible up to a specified maximum.
- Employees are not currently taxed on employer contributions made to SEP-IRAs on their behalf.
- Earnings inside SEP-IRAs accumulate on a tax-deferred basis.
- In 2007 employer contributions to a particular individual's IRA may not exceed the lesser of $45,000 or 25 percent of the individual's compensation, up to maximum annual compensation of $225,000.
- For 2008 employer contributions to a particular individual's IRA may not exceed the lesser of $46,000 or 25 percent of the individual's compensation, up to maximum annual compensation of $230,000.
- An employer is not required to make annual contributions.
- Allocations of employer contributions generally must be on the basis of a uniform percentage to the IRA of each eligible employee (unless the SEP plan is integrated with Social Security).
- An employee is always 100 percent vested in employer contributions allocated to an individual IRA.
In addition to the tax benefits, SEP plans offer additional advantages to employers and employees: - A SEP plan can be established very easily by completing IRS Model Form 5305-SEP. (An employer may prefer to establish a customized plan, subject to IRS approval.)
- A SEP plan is easier to administer than a 401(k) plan or other type of qualified retirement plan.
- ERISA reporting requirements are greatly reduced compared to qualified retirement plans.
- Distributions from SEP-IRAs are taxed as ordinary income when received.
- Distributions prior to age 59 1/2 are subject to a 10% penalty tax (in addition to the regular income tax) unless certain exceptions apply.
- Distributions must begin after the participant reaches age 70 1/2.
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