a Simple Retirement Plan? Check out a SEP-IRA
Two critical issues
facing many small business owners are time and cash flow. Shortages of
either, or both, of these commodities often result in neglecting the advantages
of having a company retirement plan. In today's environment, a company
retirement plan can become a valuable asset for the owner and employees
of the company. Along with providing a way for the owner to accumulate
wealth, a retirement plan can help to attract, retain and motivate employees.
The key is finding the right type of plan.
A Simplified Employee Pension Plan, often referred to as a SEP, is a retirement
plan specifically designed for self-employed people and small business
owners. SEPs can provide retirement benefits for owner-employees and other
employees without the high start-up and ongoing operating cost normally
found with traditional plans.
For the Employer
Almost every employer can set up a SEP. Sole proprietors, partnerships,
and corporations can use them. There is no limit to the number of employees
the business can cover with a SEP. The business may even establish a SEP
if the owner is the sole employee.
SEPs are easy to establish
and have minimal paperwork requirements. SEPs also have very flexible
contribution requirements. Each year the company decides whether to make
a SEP contribution.
For the Employee
Using a SEP, a business can set aside as much as 25% of each participants
net pay annually to a maximum of $53,000 in 2016. Employees are not able
to make contributions to their SEP. The earnings on the funds within the
SEP are tax deferred and can become a significant part of the employee's
- Eligibility -
Eligibility must be offered to all employees who are at least 21 years
old, have been employed by the business in at least 3 of the last 5
years and have earned at least $500 in a year. There are also some exclusions
for employees covered by a collective bargaining agreement and resident
- Vesting - There
is immediate 100% vesting once company contributions have been made.
- Timing of contributions
- The employer can decide whether or not to make a contribution each
year. Contributions must be made by the time the company tax return
- Setting up SEPs
- The company must complete IRS Form 5305-SEP and give a copy to each
employee along with a summary plan description. All participants must
have an IRA to receive their contribution.
- Investment options
- Since the accounts are really just IRAs, each participant makes their
own investment decisions.
Be sure to speak with your financial advisor to learn more details on
how a SEP can add value to your business. The right type of retirement
plan can help your business grow and prosper by providing employees an
additional reason to work hard and remain loyal. It also can help you,
the owner, achieve your financial objectives.