1. Simplified Employee Pension Chapter 24 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company1 What is it? A Simplified Employee Pension (SEP) is an employer-sponsored plan under which contributions are made to the participating employee’s IRA Contributions can be made at much higher levels than under a traditional IRA

2. Simplified Employee Pension Chapter 24 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company2 When is it indicated? When the employer wants a simpler, less costly alternative to a qualified plan When it is too late to adopt a qualified plan (qualified plans must be adopted before the end of the plan year; a SEP can be adopted as late as the tax return filing date for the year)

3. Simplified Employee Pension Chapter 24 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company3 Advantages A SEP adoption is easy and inexpensive Benefits are portable since funding consists of IRAs SEPs provide a great deal of funding flexibility for employers Participants benefit from positive investment results (but risk of poor results) A SAR-SEP IRA (adopted before 1997) can permit salary reduction contributions by employees

4. Simplified Employee Pension Chapter 24 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company4 Advantages (cont) A SEP can be adopted at any time up to the tax return filing date for the year for which it is adopted, including extensions. If an incorporated employer uses the calendar year, the tax return filing deadline for the year 2009 is March 15, 2010, with extensions possible to September 15, 2010. Therefore, the SEP could be adopted for 2009 as late as September 15, 2010.

5. Simplified Employee Pension Chapter 24 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company5 Disadvantages SEPs are not reliable as a stand-alone retirement plan, particularly for employees entering the plan at later ages The annual contribution may be restricted to lesser amounts than would be available in a qualified plan.

6. Simplified Employee Pension Chapter 24 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company6 Tax Implications The employer deduction for contributions to the plan is 25% of total payroll, provided contributions are made under a written formula and satisfies specified requirements The plan must cover all employees who are at least 21 years of age and have worked 3 of the last 5 calendar years

7. Simplified Employee Pension Chapter 24 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company7 Tax Implications (cont) Contributions need not be made for employees whose earnings was less than $550 (in 2009) The plan may exclude union employees (if retirement benefits have been the subject of good- faith bargaining) There is no minimum funding requirement for a SEP; the employer may make or omit contributions in any year without adverse tax consequences

8. Simplified Employee Pension Chapter 24 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company8 Tax Implications Distributions from a SEP IRA are generally treated like those from a traditional IRA The 10% early distribution penalty applies to pre- age 59½ distributions unless an exception applies The saver’s credit may be available to lower income SEP IRA participants

9. Simplified Employee Pension Chapter 24 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company9 Tax Implications (cont) Contributions must be allocated to all participants under a written formula that does not discriminate in favor of highly compensated employees. The SEP contribution formula may be integrated with Social Security under the rules applicable to qualified defined contribution plans.

10. Simplified Employee Pension Chapter 24 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company10 Tax Implications (cont) A SEP can cover sole proprietors or partners, as well as regular employees. Instead of “compensation,” earned income is used in computing SEP contributions of a self-employed individual.

11. Simplified Employee Pension Chapter 24 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company11 Tax Implications (cont) A Salary Reduction SEP (or SAR-SEP) was available prior to 1997, and many continue to operate. They are funded through salary deferral (like a 401(k) plan) but are permitted only for employers with 25 or fewer employees. SAR-SEPs have the same contribution limits as traditional 401(k) plans

12. Simplified Employee Pension Chapter 24 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company12 Tax Implications (cont) If an employer maintains both a SEP and a qualified plan, employer contributions to the SEP reduce the amount that can be deducted for contributions to the qualified plan. Employer contributions to the employee’s SEP IRA are excluded from the employee’s income

13. Simplified Employee Pension Chapter 24 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company13 Tax Implications (cont) Direct employer contributions to a SEP are not subject to FICA/FUTA withholding. State tax withholding varies by state. Certain employees may be eligible for the $500 tax credit for start-up expenses incurred in adopting a SEP.

14. Simplified Employee Pension Chapter 24 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company14 Tax Implications (cont) An individual cannot make deductible contributions to his or her own IRA after reaching age 70½, but employers can make contributions to a SEP IRA for employees over age 70½.

15. Simplified Employee Pension Chapter 24 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company15 Tax Implications (cont) A SEP participant may still make contributions to his or her traditional IRA. A SEP participant is an “active participant” for purposes of determining whether traditional IRA contributions are deductible, if any allocation is made to his or her account.

16. Simplified Employee Pension Chapter 24 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company16 How to Install A Plan Installation can be accomplished simply by completing Form 5305-SEP (IRS model form) SEP can be adopted anytime prior to the tax filing date for the year in which the SEP is to take effect

17. Simplified Employee Pension Chapter 24 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company17 How to Install A Plan Form 5305-SEP is somewhat inflexible: –Not integrated with Social Security –Cannot be used if the employer maintains another plan, or maintained one in the past covering one or more of same employees Custom designed SEP (at higher cost) can overcome these limitations.

18. Simplified Employee Pension Chapter 24 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company18 ERISA Requirements Reporting and disclosure requirements are simplified if employer uses Form 5305-SEP. Annual report (Form 5500 series) need not be filed if Form 5305-SEP is used. Otherwise, reporting and disclosure requirements are similar to those for a qualified profit sharing plan.