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Simplified Employee Pension Plan (SEP) 

Who is eligible to set-up a SEP IRA plan?

• Sole proprietors
• Partnerships
• Corporations, including S corporations

Advantages of a SEP IRA plan

• Contributions to a SEP are tax deductible  and your business pays no taxes on the earnings on the investments. Earnings on the SEP grow tax-deferred until withdrawn.

• The cost to administer a SEP IRA plan is low.

• You are not locked into making contributions every year. In fact, you decide each year whether, and how much, to contribute to your employees’ SEP-IRAs.

• SEP IRAs  are not required to file annual financial reports with the Federal government

• You may be eligible for a tax credit of up to $500 per year for each of the first 3 years for the cost of starting the SEP IRA plan.

SEP IRA Contribution Limits
An employer may contribute up to 25% of the eligible employee's compensation, providing the contribution does not exceed $44,000 for 2006 and subject to annual cost-of-living adjustments for later years. 

The compensation cap is the maximum compensation that may be considered for employer-plan purposes and is $220,00.00. For employers who base their SEP contributions on a formula integrated with social security, the social security wage base increases from the 2005 base of $90,000 to $94,200 in 2006. There are three acceptable contribution formulas that may be used to allocate contributions to a SEP plan. The formulas are flat dollar, pro-rata and social security integration.

Simplified Employee Pensions for a small companies with a few employees

The annual contributions made by the employer is tax deductible.

Contributions are made by the employer, employees do not contribute. All eligible employees have their own individual SEP IRA accounts and annual contributions are made by the employer to all of the SEP IRA accounts. The employer can elect to contribute between 0% to 25% of compensation and the percentage of contribution can vary annually at the employer's discretion. The employer and all eligible employees must receive the same fixed percentage. 

How do I establish a SEP?

Three easy steps

You establish a SEP by adopting a SEP agreement and having your eligible employees establish SEP-IRAs. There are three basic steps in setting up a SEP, all of which must be satisfied.

• You must complete Form 5305-SEP, Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement. 
  
• You must give each eligible employee  SEP using the Form 5305-SEP a copy of the Form 5305-SEP.
  
• A SEP-IRA must be set up for each eligible employee.  The SEP-IRA is owned and controlled by the employee and you send the SEP contributions to the financial institution where the SEP-IRA is maintained.

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