What is a SEP?

SEPs are the acronym for Simplified Employee Pension IRA plan. SEPs are for business owners who would like a low cost alternative to the qualified retirement plan (QRP). QRPs, such as a profit sharing plan, are often paired with a 401(k); however - they are complex, need a third party administrator and cost.

The SEP is the government's gift to small business owners who want none of the complexity or cost of a QRP. Whereas the QRP must be established by December 31, a SEP can be established and funded by the tax filing deadline - including extensions - of the business.

SEPs do not permit employee deferrals; in other words - employees cannot reduce their pay, pre-tax, and contribute to the plan. Only company contributions are allowed.

Easy To Establish
A QRP must have a long, expensive plan document. A SEP can be set up by completing the IRA Model Form 5305-SEP. Employees would open up SEP-IRA accounts at the financial institution. The company contribution would be placed in the employee's individual account.

Including Employees
The standard SEP IRA covers employees who meet the following requirements:

• Employees who worked for the employer for at least three of the five preceding years
• Employees who earned at least $500 for the year (for 2008)
• Employees who are at least 21 years old
• Employees who are not part of a collective bargaining agreement (union employees whose retirement benefits were determined under a collective bargaining agreement)
• Employees who are nonresident aliens with US income from the employer

Of course, the business owner can choose to be less restrictive.

SEP Contributions
For 2008, a business owner could have contributed the lesser of 25% of an employee's salary or $46,000. For 2009, the ceiling is increased to $49,000. If the business owner is a sole proprietor, the percentage amount is limited to 20% of modified net profit. Contributions are a deduction on the business' tax return.

Advantages of a SEP
A SEP IRA has a number of advantages over qualified plans. These include:

• Easy administration - no discrimination
• Easy to communicate to employees
• Low maintenance cost
• Discretionary contributions - percentage contributed can be changed each year.

SEPs are specifically geared for the small business owner who can (and wants) to contribute more than a regular IRA or SIMPLE IRA.
And, if it is determined later that a QRP is better suited for the business, the SEP can easily be terminated. The SEP is easy, flexible and yet can be a powerful wealth building tool for the small business owner.