SEP Regulations
- SEP retirement plans are regulated by the IRS.tax forms image by Chad McDermott from Fotolia.com
If you own a small business and would like to set up a tax-deferred retirement plan, you need to look at simplified employee pension (SEP) plans. The regulations for SEP plans are governed by the Internal Revenue Service (IRS) and cover requirements, contributions and distributions. As compared to other corporate plans, SEPs are less costly and easier to administrate and manage. Employer contributions are discretionary and tax-deductible to the business enterprise and are not included as employee income. - Form 5305 - SEP is required to establish an SEP.contract 20309 image by pablo from Fotolia.com
If you would like to establish an SEP for your business, you must fill out IRS form 5305 - SEP, which serves as the original written adoption agreement for the SEP that covers all eligible employees, including yourself. Each participant must receive a copy of this form along with a written statement that contains information about the terms of the plan, how changes are made to the plan and when employees are to receive information about contributions to their accounts. Upon completion of the adoption agreement, you and your eligible employees must establish a SEP individual retirement account (SEP - IRA) with a bank, mutual fund, brokerage house or any other financial institution. - SEP regulations cover all eligible employees.Group of business people working together in the office. image by Andrey Kiselev from Fotolia.com
All qualifying employees, including the owner, must be at least 21 years of age, have worked at least three of the last five years immediately preceding the tax year for which the contribution is made and earned at least $500 during the tax year. Eligible employees must include part-time employees, seasonal employees and employees who become deceased or terminate employment during the year. Employers can also adopt less-restrictive eligibility rules. - Contributions can only be made by the employer and must be uniformly-applied to all employees.Electronic mail image by Warren Millar from Fotolia.com
As the employer, your obligation is to forward contributions to those eligible employees that participate in the SEP plan. The contribution limits to each employee's SEP-IRA may not exceed 25 percent of total yearly compensation or a maximum fixed dollar amount that changes from year to year and can be located under "IRS Publication 560." Since contributions to the SEP plan can only be made by you, the employer, on a discretionary basis, you do not need to make contributions every year. However, when you contribute, you must contribute to all eligible participants of the SEP in the same uniform percentage of compensation for the tax year in which the eligible employees earned money. This also applies to employees who are deceased or terminated employment before the contributions were made. Employees may not make any contributions to their SEP plan and SEP contributions are not reported as taxable income to the employee on Form W-2, but are tax- deductible to the employer. . - Distributions from a SEP-IRA before age 59 1/2 are taxable and subject to a 10 percent penalty.bank image by Pefkos from Fotolia.com
Participants in SEP-IRAs cannot take loans out against their accounts. Similar to traditional IRAs, any money withdrawn from a SEP-IRA and not rolled over into another plan is subject to income tax for the year that the employee received a distribution. If an employee withdraws money from a SEP-IRA before age 59 1/2, a 10 percent penalty is applied. Also, participants in SEP-IRAs must begin withdrawing a specific minimum amount from their accounts by April 1 of the year following the time that they reach the age of 70 1/2.
