Business Planning

SEP IRA

SEP (Simplified Employee Pension) IRA

A Simplified Employee Pension (SEP) IRA is a written arrangement that allows an employer to make contributions for employees' retirement, or personal retirement if self-employed, without becoming involved in a complex retirement plan. It is typically preferred by self-employed individuals or business owners with only a few employees. A SEP is an Individual Retirement Account (IRA). If maintained for more than one person, a SEP becomes a group of IRAs. Contributions for any participant are deposited into an IRA in the name of the participant.

Advantages of a SEP IRA

EASE OF USE

The SEP IRA is the easiest plan to set up and maintain. A SEP IRA plan eliminates:

  • the administrative complexity found in many retirement plans;
  • lengthy and detailed government reporting;
  • numerous nondiscrimination tests; and
  • complicated, restrictive contribution formulas associated with many retirement plans.

TAX BENEFITS

Employer Contributions are deductible from income in the year paid or the prior year until the tax filing deadline. Similar to a Traditional IRA, the plan's earnings are not taxed until they are withdrawn at retirement. All of the money contributed to a participant's account immediately belongs to that person.

FLEXIBILITY of CONTRIBUTIONS

Contributions to a SEP IRA can be very flexible. The employer is not required to make contributions on an annual basis but must contribute the same percentage for all employees. If you have earned income after the age of 70 1/2, you are still allowed to contribute.

SEP IRA Contributions

An employer may make an annual contributions of up to 25% of compensation, as much as $54,000 for 2017 plan year. Contributions must be made in cash. Employer contributions for each eligible employee will be the same percentage of compensation for all employees. An employer is not required to make SEP IRA contributions every year. For more information, please visit the IRS website.

Who is an eligible employee?

All eligible employees must be allowed to participate in the SEP. An eligible employee is an individual who:

  • is at least 21 years old;
  • has performed "service" for the company in at least 3 of the last 5 years; and
  • has received at least $550 in compensation from you during the year.

You may use less restrictive requirements to determine an eligible employee.

You may exclude (a)employees covered by a union agreement whose retirement benefits were bargained for in good faith by the employees' union and you; and (b) nonresident alien employees who have no U.S. source compensation from you.

Employees who meet the plan's eligibility requirements may not choose to be excluded from a SEP plan, and an employer must contribute for them.

Does SEP Plan participation affect IRA contributions?

Employees who participate in a SEP plan are considered "active participants" in an employer retirement plan. As such, the deductibility of their IRA contribution may or may not be affected, depending on their income. SEP plan participation does not, however, reduce or eliminate an employee's ability to fund an IRA, and all IRA earnings are tax-deferred, regardless of SEP plan participation. But more importantly, a SEP plan offers the advantage of a contribution which is potentially much larger than an IRA contribution.




SIMPLE IRA

The SIMPLE IRA

SIMPLE stands for Savings Incentive Match Plan for Employees, it is a written arrangement that provides a simplified way to make contributions to provide retirement income for employer and employees. Under a SIMPLE IRA, employees may choose whether to make salary reduction contributions to the SIMPLE plan. In addition, an employer will contribute matching or nonelective contributions on behalf of eligible employees.

The Benefits of a SIMPLE IRA

For the employer, a SIMPLE IRA is a benefit plan that can help attract and retain valuable employees. The plan is easy to establish and administer, and there is no annual government reporting required (no annual 5500 filing). The burden of funding the plan is shared by employer and employee, and the employer may take a tax deduction for the entire amount contributed on behalf of each employee. For the employee, the self-directed SIMPLE IRA offers the ability to save more towards retirement than through an IRA. Contributions are made on a pretax basis and will accumulate tax-deferred until distributed from the plan.

What is SIMPLE IRA eligibility?

Employers are eligible to establish and maintain a SIMPLE plan only if the employer:

  • has no more than 100 employees (including self-employed individuals) who earned $5,000 or more in compensation during that year; and;
  • does not maintain another qualified retirement plan, 403(b), or SEP at the same time.

What is the maximum that can be contributed?

Employees can defer all or part of their salary. The following table summarizes:

Scheduled Increases to the SIMPLE Salary Deferral Amount
Year Under the age of 50 Age 50 and over*
2016 $12,500 $15,500
2017 $12,500 $15,500
Participants who have attained age 50 before the end of the year can make additional contributions to a SIMPLE IRA. For more information, please visit the IRS website.

*This information should not be construed as providing tax or legal advice. Please consult with your tax advisor or attorney regarding your individual situation.

The Basics: Retirement 101