What are the simplified employee pension plan provisions?


A simplified employee pension plan, also widely referred to as a SEP, is a retirement option offering simplified administrative procedures. Simplified employee pension plans keep the necessary paperwork to a minimum, thus being the pension plan option most favored by small business owners.

Every employer can establish a simplified employee pension plan, regardless of the number of their employees and the business capital.

Employers must establish individual retirement accounts (IRAs) for each eligible employee and make direct contributions to their SEP-IRAs.

In order to set up a SEP, employers have to go through three steps:

  • A formal SEP agreement needs to be adopted, using form 5305-SEP, an individually designed SEP or an IRS-approved prototype SEP available from insurance companies, banks or other financial organizations.
  • Detailed information and instructions about the selected SEP plan option must be provided to the eligible workers.
  • Employers must establish a SEP-IRA for all their eligible employees. The workers then become the holders of the SEP-IRAs which employers can fund by sending their contributions directly to the institution managing the simplified employee pension plans.

Employer contributions under a SEP plan are immediately and completely vested, which means that the employee has complete rights over the contributions regardless of when they leave the job.

A simplified employee pension plan can be established for employees even if they already participate in a different pension plan and employers have the right to offer other retirement plans in addition to a SEP. In such a case, if the other plan is not SEP, employers can only adopt individually designed, or prototype SEPs.

Eligibility for a SEP-IRA is attained if an employee is at least age 21, has received a minimum of $500 in salary from the employer for the tax year in question, and has been employed by the same employer for a minimum of three years.

The SEP maximum employer contribution limits for 2009 are $49,000. The employer contributions cannot exceed 25 percent of the employer's compensation which has a cap of $245,000 a year.

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