| Pension & Retirement / Simplified employee pensions (SEPs) |  |
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SEPs are intended as an alternative
to "qualified" retirement plans, particularly for small
businesses like yours. The relative ease of administration and the
complete discretion you, as the employer, are permitted in deciding
whether or not to make annual contributions, are features that are
especially attractive. Here's how these plans work. If you don't already have a
qualified retirement plan, you can set up a SEP simply by using the IRS
model SEP, Form 5305-SEP. By adopting this model SEP, which doesn't have
to be filed with the IRS, you will have satisfied the SEP requirements.
This means that you, as the employer, will get a current income tax
deduction for contributions you make on behalf of your employees. Your
employees will be taxed not when the contributions are made, but at a
later date when distributions are made, usually at retirement. Depending
on your specific needs, an individually-designed SEP—instead of the
model SEP—may be appropriate. When you set up a SEP for yourself
and your employees, you will make these deductible contributions to each
employee's IRA, called a SEP-IRA, which must be IRS-approved. You may
contribute the lesser of 15 percent of compensation, or $35,000, to an
employee's SEP-IRA. Because of the limits on the amount of compensation
that can be taken into account, the maximum contribution is $25,500 for
2000 and 2001. The deduction for your contributions to employees'
SEP-IRAs isn't limited by the deduction ceiling applicable to an
individual's own contribution to a regular IRA. Your employees control
their individual IRAs and IRA investments, the earnings on which are
tax-free. There are other requirements which
you have to meet to be eligible to set up a SEP. Essentially, all
regular employees must elect to participate in the program, and
contributions can't discriminate in favor of the highly compensated
employees. But these requirements are minor compared to the bookkeeping
and other administrative burdens connected with traditional qualified
pension and profit-sharing plans. The detailed records that traditional
plans must maintain to comply with the complex nondiscrimination
regulations aren't required for SEPs. And employers aren't required to
file annual reports with IRS—Forms 5500—which, for a pension plan,
could require the services of an actuary. What record-keeping is
required can be done by a trustee of the SEP-IRAs—usually a bank or
mutual fund. Another option for a business with 100 or fewer employees is a "savings incentive match plan for employees" (i.e., a "simple" plan). Under a simple plan, a "simple IRA" is established for each eligible employee, with the employer making matching contributions based on contributions elected by participating employees under a qualified salary reduction arrangement. The simple plan is subject to much less stringent requirements than traditional qualified retirement plans. Or, an employer can adopt a "simple" 401(k) plan, with similar features to a simple plan, and automatic passage of the otherwise complex nondiscrimination test for 401(k) plans. |
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