copyright © 2002-2007 Wall Street Instructors, Inc. All rights reserved.
SIMPLIFIED EMPLOYEE PENSIONS (SEP-IRAs)
In 1978 Congress provided employers with an easier way of providing retirement benefits for themselves and their employees through Simplified Employee Pensions (SEPs). A SEP is simply an individual retirement account or annuity (IRA) which may receive a higher level of contributions from the IRA holder’s employer. Any employer, regardless of size, may establish a SEP. Because the employer is not required to establish a trust, as with other retirement plans, the employer avoids many of the fiduciary and administrative responsibilities associated with other qualified plans. The IRS has developed a simple one-page form to establish a SEP. This is the simplest, most efficient, and least expensive way for a small business to establish a retirement plan for its employees. As with all qualified plans, SEP contributions are not taxable when contributed and are deductible by the employer in the tax year they are made. Earnings in the accounts grow tax-deferred. Participants are taxed on any withdrawals in the year they are taken.
Another type of SEP, a Salary Reduction SEP, or SARSEP, allows employees to defer salary, similar to a 401(k) plan. To maintain a SARSEP, an employer must have no more than 25 eligible employees.. With the advent of SIMPLE plans in 1996, the tax code now prohibits the establishment of new SARSEPs. Employers and employees may, however, continue to make contributions to SARSEPs established before 1997.