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Discover the benefits of a Simplified Employee Pension Plan (SEP)
What is a SEP?
A Simplified Employee Pension (SEP) Plan is a retirement plan established by an employer for the employee. Each year, the employer may contribute a certain percentage to each eligible employee's IRA.
Am I eligible for a SEP?
Any employer, whether a corporation, partnership, or a self employed individual, may establish a SEP even if there are no other employees.
How much can I contribute to an employee's SEP?
Employers may make deductible contributions up $40,000 or 25% of compensation, whichever is less, for each eligible employee.
When is the contribution deadline for funding my employee's SEP?
The deadline for opening or contributing to an employee's SEP is your business's income tax filing deadline, including extensions.
Must I make a contribution for each of my employees?
Under a SEP, you must contribute a uniform percentage of compensation for each eligible employee, although you are allowed to exclude certain classes of employees if you choose. Cases for exclusion include:
- Age - You may exclude employees who are under 21 years of age, but, once the employee is eligible, contributions must continue for them even when they are over age seventy and a half.
- Service - You may exclude workers who have not worked for you at least three of the immediately preceding five years.
- Minimum Compensation - You may exclude employees who have earned less than $450 from you during the current year (subject to annual cost-of-living adjustments).
- Nonresident - You may also exclude nonresident aliens receiving no U.S. taxable earned income from you.
- Union - You may exclude union members if retirement benefits were the subject of good faith bargaining.
Do I have to contribute the same percentage each year?
No. You may vary your contribution percentage any time prior to the last day for making a contribution. Not only may you vary your contribution, you may skip the contribution entirely for any year.
What happens to the funds after I make the deposits into my employee's SEP?
Once the SEP contribution has been made, the employee's IRA account will be subject to all of the traditional IRA rules for qualified and non-qualified distributions.
When can the employee withdraw funds without incurring any IRS Penalties?
Funds can be withdrawn from the SEP without incurring a 10% IRS premature distribution penalty any time after the employee reaches age fifty-nine and a half. The penalty can be avoided before the employee reaches age fifty-nine and a half for the following exceptions:
- total and permanent disability
- eligible medical expenses in excess of 7.5% of adjusted gross income
- health insurance for IRA owners receiving unemployment compensation for 12 consecutive weeks during the current or
- preceding tax year
- qualified educational expenses
- qualified first-time home buyers
How are funds taxed at distribution?
If the employee is over age fifty-nine and a half, simply include the taxable portion of the amount withdrawn (generally, deductible contributions and all earnings) as income. However, if the employee is under age fifty-nine and a half, and does not meet one of the exceptions, a 10% IRS penalty for premature distributions must be paid. The non-deductible portion of the distribution is not taxable when withdrawn nor is it subject to the 10% premature distribution penalty.
When must the employee withdraw funds?
The year in which the employee turns seventy and a half, the minimum required distribution must be withdrawn or severe penalties will be imposed.
What happens in the event of the employee's death?
The employee's named beneficiary(ies) will receive the entire proceeds of the SEP. The manner in which the beneficiary(ies) receive the funds is determined by the election made by the beneficiary(ies) within the guidelines of the law.
