A Simplified Employee Pension (SEP) plan is an employer-sponsored pension plan.

SEP plans are funded by various IRA options.

A Simplified Employee Pension plan offers you a convenient way to set up a plan for your employee's retirement.

Basically, each employee establishes an IRA to which the employer contributes.

The employee owns the contract, but the employer makes the contributions.

The employer decides whether to make contributions, and what percentage of the employee's compensation (earned income) is to be contributed. That percentage is the same for each eligible employee.

The employer's annual contributions are limited to 25% of the employee's compensation, or $44,000, whichever is less. 

The plan is flexible. The employer may discontinue contributions, increase contributions or terminate the plan for a given year without IRS approval and without regard to profitability.

There are not any complicated forms that the employer must complete. American Fidelity will be glad to provide you a prototype document that is simple and straightforward.

SEP plans have lower set up costs than regular pension or profit-sharing plans. As an employee benefit, the SEP contribution made by the employer is tax-deductible to the business. The employer's contribution is excluded from the employee's compensation, so it is not includable in gross or taxable wages. The SEP grows income tax-deferred until the money is withdrawn or distributed.

An employer must include employees who meet these requirements:

• at least 21 years of age,
• worked for the employer during the year the contribution is made and for any 3 of the preceding 5 years, and
• earned the minimum compensation during the year for which the contribution is made.
• The employer may exclude all employees covered by a collective bargaining agreement (if retirement benefits were the subject of good-faith bargaining).

Contributions are not includable in income to the extent that they do not exceed IRC limits and are not subject to income tax until they are withdrawn.

To avoid IRS penalty, distributions should be made after age 59½, unless payments are made as the result of death, disability or paid in substantially equal periodic payments based on a person's life expectancy. Distributions must begin in the year the employee turns age 70½.

The employer may establish less restrictive eligibility requirements, but not more restrictive ones.

Note: With a SEP, the employer makes all contributions.

Contact Us to receive more information and begin the process of establishing a SEP for your employees.

More information from the IRS: Click here to visit the IRS website.

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