A Simplified Employee Pension Individual Retirement Account (SEP IRA) is a variation of the Individual Retirement Account.  SEP IRAs are adopted by business owners to provide retirement benefits for the business owners and their employees. There are no significant administration costs for a self-employed person with no employees. If the self-employed person does have employees, all employees must receive the same benefits under an SEP plan. Since SEP accounts are treated as IRAs, funds can be invested the same way as any other IRA.

Eligible employers

Sole proprietors, small companies (both for-profit and tax-exempt) and government entities are all eligible for SEP plans.

Advantages

SEP plans have minimal paperwork and expense, minimal tax filing and no requirement to make ongoing contributions.

For plan participants, SEP plans provide creditor protection at both the federal and state levels.

Eligible employees

Any employee who has worked for three of the past five years and is 21 or older is eligible. Certain employees can be excluded, such as:

• those with annual earnings under $550 for 2010
• union members covered by a collective bargaining agreement
• nonresident aliens with no source of U.S. income

Employer contributions

• Contributions can vary or not be made at all, depending on profitability, cash flow or other factors.
• Maximum annual allocation to participant’s account is 25% of participant’s compensation, up to a maximum of $49,000 in 2010.¹
• Contributions for self-employed individuals are based on income minus 50% of any self-employment taxes paid and any deductible plan contributions, which effectively reduces the annual allocation to 20% or a maximum of $49,000 in 2010.¹
• In 2010, only the first $245,000 in annual salary may be considered when calculating contributions.
• Contributions are immediately vested.

Participant deferrals

No participant contributions allowed.

Taxes and testing

• Employer contributions are deductible from pretax profits.
• The maximum annual deduction is 25% of participant’s pay or $49,000 in 2010,¹ whichever is less.
• Top-heavy² and 415 testing are required.
• Annual IRS Form 5500 and Department of Labor filings are not required.

Fiduciary responsibility

• Fiduciaries have limited fiduciary responsibility since Individual Retirement Accounts (IRAs) are set up for each eligible employee, and participants control their own investment choices.

---

The above information is general in nature and is not intended as legal or tax advice. Along with our help, you should seek the advice of your tax consultant and/or attorney.