SEP Plan

(Simplified Employee Pension)

A SEP is an IRA account or individual retirement annuity established for an employee to which the company makes direct tax-deductible contributions.

It works like a profit sharing plan allowing the company to contribute up to 25% of an employee's salary or $69,000 (2024 - Indexed), whichever is less. For the employer who values simplicity, a SEP may be the ideal plan. The SEP plan does not require plan and trust agreements or the plan sponsor to file 5500 tax forms annually.

Since contributions to a SEP are made directly into IRA accounts, it eliminates the need for detailed record keeping. The employee controls the IRA making his own investment decisions. This makes it completely portable from day one. No distribution and withholding forms required. Note: This control means the employee could "cash out" their IRA immediately (subject to taxation and penalties).

While SEPs are usually most attractive to Owner-Employee businesses, SEPs are available to both C and S Corporations, Partnerships and Sole-proprietorships. Note however that SEPs are not available for Employers with more than 100 Employees. SEPs may be established after the end of the year up to the tax filing date of the Employer, including extensions.

Disadvantages

Unlike the qualified retirement plans, SEPs are considered IRAs and do not offer the advantages of salary deferral, loans, vesting, the shield from creditors' claims (some jurisdictions) or the exclusion of part time employees. Eligibility rules for a SEP are less restrictive than the rules for Qualified Plans. This can result in higher cost to the Employer. Many employees who are not required to be covered under a Qualified Plan must be covered under a SEP. All employees 21 years of age or older who have worked for the employer 3 of the last 5 years, earning $450 must be included in the plan. This means covering part-time and seasonal workers , regardless of how few hours they worked during the year. Note: Employees covered by a collective bargaining agreement may be excluded.

In addition, in a SEP, employees must be fully vested at all times. This can result in higher cost to the Employer especially when employee turn-over is high. In a Qualified Plan, vesting can be gradually phased in to favor longer-term employees.

Advantages

•minimal amount of paperwork and bookkeeping to start and maintain a plan.

•cost of consultant (lawyers, accountants, actuaries, administrators) are sharply reduced, oftentimes eliminated.

•flexibility in contributions - like a profit sharing plan, an employer may skip a contribution or put in any amount up to the 25% or $69,000 limit.

•since the participants make their own investment decisions, the employers fiduciary duty is reduced.

•a SEP may be established after the end of the employer's taxable year.