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SEP stands for "Simplified Employee Pension Plan" and can best be described as a retirement plan adopted by the employer whereby the employer makes contributions to the employee's Individual Retirement Account.
Contribution limits are generally 25% of total annual compensation, not to exceed $44,000. These employees must all have attained age 21 and have worked for the employer at least 3 of the preceding 5 years. Eligible employees can only enter into the plan on the first day of the plan year.
Virtually all type of employers including sole proprietors, partnerships and corporations can establish SEP plans and, unlike SIMPLE 401(k) and SIMPLE IRA's, there's no restriction on the amount of the number of total employees.
Under current law, an employer may or may not contribute to a SEP plan in any given year, similar to a profit sharing plan. The maximum annual contribution that an employee can make is the lesser of 25% of wages or $44,000.
And, this contribution is not discriminatory. It must be made in the same amount to all eligible employees, except for the sole proprietor or partners.
The benefits to a SEP plan, as with any other tax qualified plans, are eligible income tax deductions and tax-free growth until withdrawn. Distributions are taxed at ordinary income tax rates.
Secondly, the contributions, which are made to a SEP plan, are NOT includable in the employee's W2 income statements and are not subject to FICA or FUTA taxes.
SEPS are subject to "top heavy testing" obligations and, if it is found to be so (favoring key employees of high wage earners), then current law mandates a 3% minimum contribution on behalf of each participant who is not a key employee.
As with all qualified plans, you must follow the IRA prescribed guidelines and rules to ensure proper and legal funding. Calculations can be made by us or by your CPA or tax advisor.
If established and maintained properly, SEP plans are an excellent savings tool as they allow high annual contributions more than most other qualified plans. They are ideal and commonly found in small business situations.
The only drawbacks and additional considerations you must weigh are the facts that you must wait until age 59 to access the monies without penalties, distributions are fully taxable upon receipt and the employer must make contributions on behalf of other employees.
Action
To Take We are very accustomed to working with small business owners and their key employees. We offer a wide variety of SEP plans and sample documentation for plan implementation. If you are interested in learning more about SEP plans and the various funding options available, please click HERE.
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Fielder Financial Management, LTD.
All Rights Reserved.
Securities are offered through Girard Securities, Inc.
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Mark R. Fielder, Registered Principal. CA. Insurance Lic. # 0690576.
