What is a Simplified Employee Pension (SEP)?
A Simplified Employee Pension (SEP) is a special type of IRA that can be established by your employer or by you, if you are self-employed. Designed for small businesses, SEPs have many of the characteristics of qualified plans but are much simpler to establish and administer.
Any Employer Can Establish a SEP
Under a SEP, each participant has his or her own individual retirement account to which the employer contributes. The contributions are excluded from the participant's pay and are not taxable until they are distributed from the plan. If you are self-employed you may establish a SEP for yourself, even if you have no employees.
The advantage of a SEP over a regular IRA is that the contribution limits are higher. In general, the contribution can be as much as 25% of your annual compensation, up to a maximum contribution of $54,000.
The disadvantage of a SEP from an employer's standpoint is that an employer that establishes a SEP is required to make contributions on behalf of virtually all employees. Moreover, the employees must be 100% vested at all times. Those can be costly requirements for small employers whose workers often include many short-term part-time employees. In contrast, a 401(k) plan, as well as other qualified plans, can extend the period before an employee is fully vested.
Please contact one of our IRA Experts at 800-472-0646 for more information.