SEP
The Simplified Employee Pension Plan is another way that your customer can accumulate money on a before-tax basis. A SEP is an employer’s sponsored retirement plan. A SEP can be used by almost any small business, whether a corporation, partnership, or sole proprietor. Even an owner of a small business without any employees can have his own SEP.
The SEP allows premiums by an employer of 25% of an employee’s compensation up to $41,000 per year per employee. Must the employer cover all employees? Yes and No! An employer cannot discriminate but there are conditions in which employees can be excluded
Who Do You Know Who Owns A Business And They:
- Want a pension plan with less paperwork.
- Want to avoid the expense of actuarial certification.
- Want no expensive fees to draft a plan.
- Want no special reporting requirements.
- Want no fixed-contribution requirement each year.
Then, a SEP is something they should consider.
Example
Mark and Laurie, ages 35 and 36 respectively, own a small software company with two other employees. Both Mark and Laurie each earn a salary of $150,000 a year. Their two other employees are Julie, age 18, who comes to work after school each day to do odds and ends, and Jim, who earns $50,000 a year as Mark’s and Laurie’s webmaster. While Julie has been coming to work after school for four years, Jim has only been with Mark and Laurie for one year and hopes to relocate on the other side of the country to be close to his parents.
Since Mark and Laurie are concerned with their retirement, they wish to review some of their retirement options with their agent. They want to be able to make a generous contribution for themselves, but not necessarily for their employees. They also want ease and little recordkeeping.
Mark, Laurie, and their agent review some of the retirement options available. A 412(i) was initially considered, but was ruled out since the 412(i) often works best with older employees. Finally, after much discussion and an important fact finding question and answer period between the agent, Mark, and Laurie, they concluded that a SEP (A Simplified Employee Pension Plan) would be in their best interest. Firstly, Mark and Laurie could each make a contribution of $37,500 each (25% times the salary of $150,000). In addition, no contribution was required for Julie since she is a part-time employee and no current contribution would be required for Jim since he has not been with the firm three years or longer. In addition, Mark and Laurie were able to have a special retirement plan with no actuarial fees and little recordkeeping.
What can be learned from this example? A SEP can be an effective tool under the right circumstances and an informed agent and consumer make informed decisions.
What happens if a pension participant elects a distribution from his/her pension plan?
If a total distribution is elected by the participant, 20% of the distribution will be deducted by the employer for possible income taxes. Possible income taxes? Yes, the 20% withheld can be credited to the participant if the participant rolls over the entire total distribution (the amount prior to the deduction) into an IRA or into another qualified plan within 60 days of receiving the distribution.
