Simplified Employee Pensions (SEPs) are a popular retirement plan for small businesses since they are easy to set up and administer. To set up a model SEP you complete Form 5305-SEP, Simplified Employee Pension-Individual Retirement Accounts Contribution Agreement, and retain it in the company’s files. A SEP-IRA account (similar to a Traditional IRA account) is opened for each participant at a selected financial institution.
Benefits of a SEP retirement plan include:
- The plan is funded solely by employer contributions. (This is a drawback for those employers that want to allow employees to make salary deferral contributions);
- Contributions are usually tax deductible for the employer;
- Employers are not required to make contributions each year;
- Earnings are tax deferred until withdrawn; and
- Employees may take distributions from their SEP-IRA under the same rules that apply to the Traditional IRA.
Eligibility requirements to participate in a SEP include:
Any employee who is at least 21 years old, has performed services for the sponsoring employer in at least three of the immediate past five years, and earned at least $550 for the current year must be permitted to participate in the employer’s SEP.
Why the SEP is now more attractive:
Changes in the tax laws have made a SEP more attractive for some small business owners. Employer contribution limits have increased from 15% of compensation to 25% of compensation, or a maximum of $51,000 for each employee in 2013. The tax law changes brought SEPs into conformity with the 25% defined contribution plan limits.
If your C.P.A. or financial adviser has recommended you open a retirement plan in order to maximize your retirement contributions, you might want to consider a SEP. Compared to a defined contribution plan, the SEP is generally easier and less costly to administer, contributions by the employer are discretionary based on profits of the business, and no annual tax return is required. A Form 5500, Annual Return/Report of Employee Benefit Plan, must be filed annually once the account balance reaches $250,000.
There are many factors to consider when choosing the right retirement plan for your business. If you would like any further information regarding this issue as well as any other tax related issue, please contact Henssler Financial at 770-429-9166 or experts@henssler.com.
Disclosures
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