Why is this Topic Important to Wealth Managers? Presents discussion on the basics of Simplified Employee Pension (SEP) plans. Discusses the requirements of SEP plans for employers as well as providing the necessary steps to establish a SEP plan.
SEP is a written plan that allows a business to make contributions toward executive’s retirement and employees’ retirement without getting involved in a more complex qualified plan.
Under a SEP, the business makes the contributions to a traditional individual retirement arrangement (called a SEP-IRA) set up by or for each eligible employee. A SEP-IRA is owned and controlled by the employee, and the business makes contributions to the financial institution where the SEP-IRA is maintained.
SEP-IRAs are set up for, at a minimum, each eligible employee. An eligible employee means an individual who meets all the following requirements: the individual has reached age 21, has worked for the business in at least 3 of the last 5 years, and has received at least $550 in compensation from the business in 2010. 
There are three basic steps in setting up a SEP.
- The business must execute a formal written agreement to provide benefits to all eligible employees.
- The business must give each eligible employee certain information about the SEP.
- A SEP-IRA must be set up by or for each eligible employee.
In many situations, a SEP’s formal written agreement requirement can be satisfied by adopting an IRS model SEP using Form 5305-SEP.
The SEP rules permit the business to contribute a limited amount of money each year to each employee’s SEP-IRA. Also, generally, the business does not have to make contributions every year. But if it does make contributions, they must be based on a written allocation formula and must not discriminate in favor of highly compensated employees. 
When the business contributes, it must contribute to the SEP-IRAs of all participants who actually performed personal services during the year for which the contributions are made, including employees who die or terminate employment before the contributions are made. These contributions are deductible within limits, so long as the contribution is made by the due date for the taxable year, and are generally not taxable to the plan participants. 
Deductible contributions the business makes for 2010 to a common-law employee’s SEP-IRA cannot exceed the lesser of 25% of the employee’s compensation or $49,000. 
Example 1: Employee 1, Mary Plant, earned $21,000 for 2010. The maximum contribution the business may make to her SEP-IRA is $5,250 (25% x $21,000).
Example 2: Employee 2, Susan Green, earned $210,000 for 2010. Because of the maximum contribution limit for 2010, the business can only contribute $49,000 to her SEP-IRA.
Further, if a business made SEP contributions that are more than the deduction limit (nondeductible contributions), the business may carry over and deduct the difference in later years. Nevertheless, the carryover, when combined with the contribution for the later year, is subject to the deduction limit for that year.
For more information on SEP plans, please visit our subscriber library through Advanced Markets Advisor FX: SEPs And Simple Plans.
Tomorrow’s blogticle will begin our discussion on additional changes and hot topics in 2011.
We invite your opinions and comments by posting them below, or by calling the Panel of Experts.
 I.R.C. §408(k)(3).
 I.R.C. §402(h)(2).
 I.R.C. §402(h)(2).; I.R.C. §415(c)(1)(A).