A Simplified Employee Pension (SEP) is a business retirement plan that uses Traditional IRAs as an investment vehicle. This plan allows an employer to make contributions for the retirement of its employees, without becoming involved in more complex retirement administration. Any employer, whether incorporated or unincorporated, with full time or part time employees, is eligible to establish a SEP plan providing that the business does not maintain another retirement plan. This includes businesses with no employees other than the owner/employee. Fixed-rate and variable-rate certificates are available for First Bank SEP plans, depending on the specific financial interests of the employer and employee(s).
- A SEP plan allows an employer to provide a retirement plan for employees by making a contribution to each eligible employee's Traditional IRA. Each year the employer may contribute a certain percentage of each eligible employee's compensation directly to the employee's IRA.
- You qualify to establish a SEP plan if:
- You are a self-employed individual, whether incorporated or not
- You are the owner of a business - even if you have no other employees. You are considered an employee who is eligible to receive a SEP (employer) contribution.
- Your company does not maintain another retirement plan
- Contributions made by the employer are tax-deductible to the employer
- Contributions are limited to a maximum of 25% of compensation (the IRS has a set maximum contribution cap which limits the contribution to 25% of compensation or the cap, whichever is less). For 2002 the maximum contribution cap is $40,000.
- The employee is still eligible to contribute 100% of earned income or $3,000 (or $3,500 if employee is age 50 or older), whichever is less, to his/her Traditional IRA or Roth IRA
- Participation in a SEP plan does make employees active participants in an employer retirement plan. As such, the deductibility of a Traditional or Roth IRA contribution may or may not be affected, depending on the employee's income.
Deductibility Threshold Chart
- The employer is not required to contribute to the SEP every year and may change the contribution percentage each year. However, if a contribution is made it must be the same percentage for all eligible employees.
- Once the SEP plan is established, the employer may set eligibility requirements for the employee(s). The eligibility requirements are restricted by the following:
- The SEP plan must not discriminate in favor of the highly compensated employees
- The employer may elect a minimum age which the employees must reach before the employees are allowed to participate in the SEP plan. The minimum age requirement, however, cannot exceed 21 years. The employer can choose any age less than 21 years.
- The employer may select a service requirement anywhere from 0-3 years. Three years is the maximum service requirement and is a common election for the SEP plan. Additional service requirements apply. Please consult your tax advisor.
- If the employee makes less than $450 (adjusted annually), the employer can elect to make the employee ineligible for the SEP. Part-time employees cannot be excluded on this basis.
- The plan may exclude employees who are covered by a collective bargaining agreement (union employees) and certain non-resident aliens.
Frequently Asked Questions about SEP plans
Investment Options for First Bank SEP plans
Compare IRA plans
To find out more about a Simplifed Employee Pension, call or visit the First Bank location nearest you.