In last week's
column, part of my series on qualified retirement plans, I discussed an option that has been around for a while: Keogh plans. This week, the last column in the series, we will look at another plan that has been offered for several years: the Simplified Employee Pension, or SEP.
The plan, often referred to as a SEP-IRA, is relatively easy to establish and maintain. SEPs are available for all businesses, including sole proprietorships, partnerships and corporations.
To set up a SEP, an employer typically completes a brief adoption agreement and has each eligible employee open an IRA. The employer then makes contributions directly into those IRA accounts. Unlike other qualified plans, there are no trust documents or summary-plan descriptions to be filed with the
Department of Labor
As with my previous recommendations, I would suggest using an independent custodian to set up the IRAs. By independent, I mean companies that enable you to invest with maximum flexibility. For instance, if you set up a SEP-IRA with a mutual fund family, a bank or an insurance company, you will be limited to the investments they offer. While you will have to pay an annual fee with an independent custodian, it is worth the extra charge to have access to a broad spectrum of nonproprietary investments. The annual fee per IRA ranges from $15 to $50 per year.
The employer's annual contribution to a SEP on behalf of each employee is limited to 15% of the employee's compensation to a maximum of $24,000. That in effect creates an individual compensation cap of $160,000; if you go over that you would exceed the $24,000 limit.
A SEP may not discriminate in favor of highly compensated employees. Contributions must be the same percentage of compensation for each eligible employee.
Employers have a lot of flexibility from the standpoint of what they either want to or are able to contribute each year. Just like a profit-sharing plan, it is totally discretionary. In a good year, the business could contribute the maximum of 15% or in not so good years it could be reduced or not made at all.
SEPs are unique in that they can be set up after the end of the year. The business owner has until April 15 (unless a tax filing extension is made). So, if you are on an extension and you have had a good year but weren't thinking about a tax deduction it may not be too late. Of course, you will need to have enough cash to make the contributions.
Who is eligible to be included in a SEP-IRA? To be eligible, an employee must be over 21, earn at least $400 a year and have performed service for the employer in at least three of the previous five years.
Once the employee has an IRA set up and the employer has made a contribution, the employee can select his or her own IRA investment. If an employee has an existing IRA, the employer could make a contribution to the existing IRA.
All contributions to a SEP by an employer are 100% vested and the participant can withdraw the money anytime. Of course, all amounts withdrawn are taxable at ordinary income-tax rates. If money is withdrawn before age 59, it will be subject to a 10% federal penalty tax unless one of the exclusions apply.
If you are a business owner and you would like a tax-deductible, tax-deferred retirement plan with minimal paperwork, no legal or administrative expense and no federal or participant reporting, a SEP might be the plan for you.
Have a good week!
P.S. -- Many of you have sent me e-mails with lots of questions. I cannot answer specific questions, so I have suggested that people contact a retirement benefit specialist in their area. Sorry for the cop-out, but if I can make you aware of opportunities and the concepts, hopefully that will start you in the right direction.
Vern Hayden is a certified financial planner in Westport, Conn. He is a financial consultant and advisory associate of Financial Network Investment Corp. He also is an owner of Hayden Financial Group. His column is not a recommendation to buy or sell stocks or to solicit transactions or clients. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds. While he cannot provide investment advice or recommendations, Hayden welcomes your feedback at