A Simplified Employee Pension plan is an employer sponsored retirement plan that, unlike a traditional qualified plan, has minimal IRS reporting and disclosure requirements for compliance. The employer deposits contributions into the IRA of each plan participant, not into an employer trust account, thereby simplifying the accounting process. Any type of business entity, including a sole proprietorship, partnership or corporation, as well as certain tax-exempt organizations, can establish a SEP plan for its employees. The plan must be in place and funded by the date the employer's tax return is due, including extensions. Most SEP plans are established using the IRS Model 5305-SEP form.

Eligibility

An employee who is at least 21 years old and has worked for the employer in any three of the preceding five years is eligible to participate. A SEP contribution must be made in the current year on his or her behalf, provided the employee earned in excess of the minimum indexed compensation amount ($450 in 2003). The employer may set less restrictive age or service requirements, but the eligibility rules must be applied on a consistent basis to all employees, including owner-employees.

Contributions

A SEP plan is funded by the employer on a discretionary basis. The contribution limit for a SEP plan is the lesser of 25% of an individual employee's compensation or $40,000 and is generally allocated on a uniform percentage of salary basis. Social Security integration is allowed in SEP plans, but increases the administrative complexity and cost, and is available only when a prototype SEP plan document is used.

The primary difference between SEP and profit sharing plan contribution limits is that the 25% SEP limit* is applicable to each individual participant, whereas the 25% profit sharing limit is applicable to the employer contribution as a percentage of the company's eligible payroll.

*Employees age 50 and older may make a catch-up contribution of $500 for 2003.

Advantages

A SEP plan is easy to set up. It is comparable to an employer establishing and funding a company-provided IRA for the benefit of each employee. There are no requirements for a separate employer trust document and administrative costs are minimal. Employers sponsoring SEP plans are not required to file annual plan returns (Form 5500) like those employers sponsoring qualified pension or profit sharing plans. In addition, the SEP plan offers tax planning and contribution flexibility. An employer can establish a SEP plan up until his tax-filing deadline, unlike qualified pension or profit sharing plans, which must be in place no later than the last day of the plan year.

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