and SEP IRA Plans
What is a SEP IRA?
A Simplified Employee Pension (SEP) Plan is a retirement plan whereby an
employer makes contributions on behalf of their employees. As the employers
profit fluctuates from year to year, so can the employers contributions to the
plan. SEP Plans are ideal for self-employed people and small business owners.
The SEP is intended to be an attractive alternative to tax qualified retirement
plans which are subject to ERISA because a SEP plan is relatively easy and
inexpensive to establish and administer.
Contributions by Employers
Contributions to SEP plans provide valuable tax benefits to employers.
The employer contributes toward its employees retirement savings while
enjoying the benefit of reduced federal income taxes. Such tax savings
can in turn be viewed as helping to fund the plan. An employer is
eligible to take a federal income tax deduction under IRC Section 404(h)
for amounts contributed to a SEP plan.
The only required forms are a pre-approved IRS 5305-SEP
form and an IRA application for each participant.
No initial or annual required filings.
Contributions can vary from year to year
or even skipped occasionally.
Employees are not permitted to make
contributions but can decide to invest employer contributions.
Only an annual custodial fee of $15 per account per
participant up to a maximum of $30 per
social security number.
More about SEP Plans
Congress made it easy for the self-employed and small business owners
to save for retirement with the
Simplified Employee Pension (SEP pronounced sep) plan.
allows an individual to put up to $40,000 a year, tax deductible, into
his or her retirement account.
When an economy is going through a shakeout like ours has these past
three years, large businesses lay off talented employees who in turn
start their own small businesses.
Once covered by corporate
retirement plans, these ex-employees must now fend for themselves when
it comes to retirement savings.
With a SEP plan, the employer or the self-employed individual
contributes directly to the employees IRA account.
not need a separate SEP account if they already have an established IRA.
Unlike the more common profit sharing or 401k plans, the SEP does not
require complicated documentation, administration or annual tax
reporting, relieving the employer of the expenses of a normal pension
SEPs are available for the self-employed (including anyone with a
part-time business), sole proprietorships, S and C corporations and
An employer can contribute up to 25% of an employees annual
compensation, not to exceed $40,000.
In the case of self-employed
individuals, compensation is considered to be income reported on
schedule C of their tax returns.
Direct employer contributions to
a SEP are not subject to Social Security (FICA) or Federal Unemployment
An employer-sponsored SEP plan cannot discriminate between employees.
Contribution percentages must be uniform in their relationship to the
compensation of each employee.
In cases where there is a large
disparity in compensation, a SEP plan may be integrated with a Social
Security wage base.
This will allow workers who make more than the
wage base to end up with a larger contribution.
Annual contributions by an employer are not mandatory and can be made
All of the contributions go into the participants
IRA, and the participant is immediately 100% vested in the contribution.
This allows participants complete control over the investments, just as
they would have in a regular participant IRA.
A SEP participant may purchase any investment allowed in an IRA.
Unlike qualified pension plans that limit in-service withdrawals, a SEP
allows the owners the right to withdraw the money immediately, subject
to taxes and early withdrawal penalties.
They may also convert the
IRA into a Roth IRA, paying taxes for the amount converted.
Withdrawals from a SEP are taxed just like an IRA, with participants
paying ordinary income taxes plus a 10% penalty if distributions are
taken before age 59 .
While loans are not permitted from a SEP,
the account owner may make a qualified 60-day withdrawal and rollover
once each year without incurring taxation or interest charges.
Employers wishing to set up a SEP for this year do not have to complete
paperwork or make the contribution until they file their 2003 taxes
(plus any extensions).
Another important feature for employers
contemplating establishment of a SEP is that employees do not have to be
covered by the plan until they have worked three years.
covered by collective bargaining agreements and non-resident aliens are
also exempt from coverage.
SEPs are an ideal pension savings plan for smaller businesses
(generally with around 10 or fewer employees) because of the flexibility
afforded the employer in timing and amounts of contribution, ease of
use, reduced administration expenses and the fact that there is no limit
to the number of employees that a SEP plan may cover.
For more information or to have us answer any questions you may have,
please contact Atlantic Financial, or contact us