Simplified Employee Pension (SEP) plans can provide a significant source of income at retirement by allowing employers to set aside money in retirement accounts for themselves and their employees. A SEP does not have the start-up and operating costs of a conventional retirement plan and allows for a contribution of up to 25 percent of each employee's pay.
How does a SEP work?
Sam works for Marlin Fishing Equipment. Marlin Fishing decides to establish a SEP for its employees. Marlin Fishing has chosen a SEP because the fishing equipment industry is cyclical in nature, with good times and down times. In good years, Marlin Fishing can make larger contributions for its employees and in down times it can reduce the amount. Marlin Fishing's contribution rate (whether large or small) must be uniform for all employees. The financial institution that the employer has chosen for its SEP has several investment funds from which to choose. Sam decides to divide the contribution to his SEP-IRA among three of the available funds. Sam, an employee, cannot contribute because SEPs only permit employer contributions.
Pros and Cons:
Who Contributes: EMPLOYER ONLY
Employer contributions for each eligible employee must be:
Filing Requirements: An employer generally has no filing requirements.Contribution Limits: Total contributions to each employee's SEP-IRA are limited.
NO LOANS are permitted against SEP IRAs. They may not be used as collateral.
In-Service Withdrawals: Yes, but includible in income and subject to a 10% additional tax if under age 59 1/2.
Let Fiduciary EDGE Advisors help you or your employer set-up or move your SEP IRA Plan:
There are three steps to establishing a SEP, Fiduciary EDGE Advisors will walk you through each step:
The Written Agreement: Will include the name of the employer, the requirements for employee participation, the signature of a responsible official and a definite allocation formula.
The IRS has a model SEP plan document, Form 5305-SEP, Simplified Employee Pension - Individual Retirement Accounts Contribution AgreementPDF. No need to file this form with the IRS.
You may not use Form 5305 - SEP if you:
If you can't use the Form 5305-SEP, you may use a prototype document. A mutual fund, insurance company, bank or other qualified institution usually provides these. You may also have a SEP individually designed for your business.
Provide information to participants
You must furnish your eligible employees:
If you use Form 5305-SEP, you must give your employees a copy of the form and its instructions. The model SEP is not considered adopted until each employee is provided with the following information:
If you use a prototype or individually designed plan you must give all eligible employees similar information.
Set up a SEP-IRA for each employee
A SEP-IRA must be set up by or for each eligible employee. They may be set up with banks, insurance companies or other qualified financial institutions. All SEP contributions must go to traditional IRAs. Employees are responsible for making investment decisions about their SEP-IRA accounts.
You and your employees will receive a statement from the financial institutions investing your SEP contributions both at the time you make the first SEP contributions and at least once a year after that. Each institution must provide a plain-language explanation of any fees and commissions it imposes on SEP assets withdrawn before the expiration of a specified period of time.
Timing of setting up a SEP plan
You can set up a SEP for a year as late as the due date (including extensions) of your business income tax return for the year you want to establish the plan.