Simplified Employee Pension Plans

A simplified employee pension (SEP) is another option for employers who want an easy way to provide retirement savings for their employees. A SEP is basically an individual retirement arrangement, similar to a traditional IRA, but referred to as a SEP-IRA, that is set up on behalf of each employee. From the perspective of the SEP participant, a SEP-IRA is not much different from a traditional IRA, except that a SEP-IRA allows the participant to put away more money each year when saving for retirement.

Employers like SEP plans because they are easy to establish and administer. Under a SEP plan, an employer sets up a traditional IRA for each qualifying employee. Although an employer may adopt less restrictive participation requirements, an employer adopting a SEP plan must allow participation if an employee meets all of the following conditions:

• The employee is at least 21 years old.
• The employee has worked for the employer during at least three of the five years immediately preceding the current year.
• The employee has received at least $550 in compensation for the year from the employer in 2013 or 2014 (This amount is subject to adjustment for inflation each year).

An employer with leased employees may have to provide them with SEP-IRAs, as well. A leased employee is generally a person who works for the employer, but was hired by a leasing organization. To qualify for SEP benefits, a leased employee must do all of the following:

• provide services under an agreement between the employer and the leasing organization
• perform services for the employer, or for the employer and related persons, on a substantially full-time basis for at least one year
• perform services under the primary direction and control of the recipient

Although an employer adopting a SEP plan must include all eligible employees in the plan, the employer may exclude the following two types of employees:

• employees covered by a union agreement if their retirement benefits were a result of good faith bargaining between their union and the employer
• nonresident alien employees who have no U.S. source earned income from their employer

An employer may offer a SEP plan in conjunction with another defined contribution plan. Employees may also make additional contributions to their SEP-IRAs independent of the employer, but they are subject to the same restrictions imposed on traditional IRAs when contributions are simultaneously being made to a retirement plan.

Distributions. The rules governing distributions from a SEP account are the same as those for traditional IRAs. The reason for this is because a SEP's funding mechanism is an IRA.

To further help you along the road of discovery on this topic, consider the following discussions of SEP plans and SEP-IRAs:

• SEP Contribution Limits: Although they have the same distribution rules as those for traditional IRAs, SEP-IRAs have their own set of contribution rules that must be considered.
• SEP Plans for the Self-Employed: SEPs are a great way for self-employed people to save for retirement and can be used even if a one-person business is involved. However, there are special requirements for the self-employed person to consider.
• Salary Reduction SEPs: Otherwise known as a SARSEP, this type of plan was repealed beginning in 1997, but may still be around if set up before then. Learn more about this type of plan if it applies to your situation.