Simple to set up, easy to administer, Simplified Employee Pension Plans may be for you

By Max Berry

Among all the 401(k)s, 403(b)s, and various types of IRAs available to you and your employees, Simplified Employee Pension (SEP) plans don't get a whole lot of attention. This doesn't mean you shouldn't consider one for your firm. If you're a small business owner just starting to offer retirement packages to your employees-or one simply looking to expand the ways employees can save-a SEP may be just the thing for you.

The Basics and the Benefits

Simplified Employee Pension plans were created with small businesses in mind. A SEP works like a traditional IRA, but with fewer start up and operating costs than other retirement programs and with a minimum of fuss on your part. Under a SEP plan, employers contribute directly to SEP-IRAs on behalf of their employees, who do not contribute. In 2009, you may invest up to 25% of an employee's salary or $49,000, whichever is less. (The figures are modified each year to reflect cost of living adjustments.)


A retirement plan based entirely on employer contributions may not, on its surface, seem like the most appealing option for a small business owner trying to make ends meet. But there are many benefits to a SEP. In addition to the plan's low operating costs, contributions to a SEP are tax deductible. There are also very few documents to file with the government and, in most cases, your financial institution will take care of this for you. Offering an employer-funded plan is also an ingratiating gesture that will promote goodwill between you and your employees.


One of the key benefits of a SEP-and the reason such a plan is ideal for small or young businesses-is that you do not have to make the same size contribution each year. Managers may adjust the amount they contribute based upon how their business has performed in a given year. If times are particularly lean, you may defer contribution altogether.


Getting Started
They call them ‘simplified' for a reason: SEPs are incredibly easy to institute and manage. Simply contact a bank or other financial institution that offers a SEP plan and complete IRS form 5305-SEP. Some financial institutions offer customized plans that have been approved by the IRS. These require you to complete a different form, but the variance between plans should be small. Take great care in selecting a financial institution to manage your plan; whichever one you choose becomes a trustee in your employees' retirement funds.


Once the SEP is in place, your main responsibility is to forward all contributions to your financial institution by the due date of your tax return. Your trustee will then invest the funds as directed by each individual employee as well as provide participants with yearly balance and contribution summaries. The trustee should also distribute a clear, non-technical explanation of the terms of the plan to each employee. With so much of the day-to-day maintenance of the plan out of your hands, it is important to remember to monitor your trustee closely. Check in with employees to see that they are satisfied with the way the plan is being run.


Keeping Everyone Covered
Employees must be at least 21 and have worked for you in at least three of the past five years to be eligible for inclusion in a SEP. Note that the rule states in three of the past five years and not for three of the past five years; any employee who has worked for you for any amount of time-no matter how little-in three of the past five years is eligible. SEPs can be run in conjunction with other retirement plans, so you may still offer some form of retirement plan to those employees who don't yet meet the eligibility requirements. However, unless the other plan is also a SEP, you cannot use the standard Form 5305. You must instead adopt a prototype or individually designed SEP. It may be simpler for everyone if the employee invests independently until he or she becomes eligible for inclusion in the SEP.


If you do institute a SEP, all eligible employees must be included in the plan. This includes part time employees, seasonal employees, and employees who die or terminate employment during the year. Likewise, contributions must be uniform for each employee-not the same monetary amount, but the same percentage of each employee's salary.


SEP balances may be rolled over to another retirement account tax-free. If an employee younger than 59 withdraws money without rolling it over to another account, the money is subject to income tax plus an additional 10% tax. Employees over 59 do not have to pay this additional tax when they withdraw. As is customary, employees must begin taking a minimum distribution from their accounts once they turn 70.


If the time comes when a SEP is no longer the best option for your business, the plan is easy to terminate. Simply notify your financial institution that you will not be making a contribution for the next year and would like to discontinue the plan. It's as simple as that.