1. ©2015, College for Financial Planning, all rights reserved. Session 8 SIMPLEs and SEPs CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits

2. Session Details Module5 Chapter(s)4, 5 LOs5-6 Describe the basic characteristics of SIMPLE IRA plans. 5-7 Describe the basic characteristics of a Simplified Employee Pension (SEP). 8-2

3. SEP Plans Simplified Employee Pension (SEP) Plans Definition Employer contributions only 2015 contribution limit = lesser of 25% of compensation (up to $265,000) or $53,000 Participant accounts are always 100% vested. Must be established by due date (including extensions) for filing employer’s return. IRA distribution and penalty rules apply. 8-3

4. SEP Plans Eligibility Requirements for a SEP Age 21 and over Performed service during 3 of the immediately 5 preceding years Earned at least $550 during the current year Example: JR Financial Group Inc., a calendar-year corporation, maintains a SEP. Matthew began working at the corporation on September 1, 2012. Matthew worked 250 hours in 2012 and 900 hours each year in 2013 and 2014. If Matthew is at least age 21 by the end of 2015 and earns $550 or more during that year (regardless of the number of hours worked), he must participate in the SEP in 2015, even if he quits work before December 31, 2015. 8-4

5. SEP Plans: for Employers 8-5 Advantages The plan is easy to establish and administer The employer usually has no responsibility for the investment results in employee IRAs Establishing and funding the plan can take place after the official end of the tax year (i.e., until the tax return due date, including extensions) The plan is flexible regarding contributions the employer decides to make, if any Contributions equal to those allowed by most defined contribution plans may be made Disadvantages The employee is automatically vested (100% vested) in the contributions; this does not help the employer retain good employees A SEP participant cannot borrow from his or her SEP-IRA account Many of the employees who do not need to be covered under a qualified retirement plan must be covered under a SEP, which can increase the employer’s costs IRA assets are not as thoroughly protected from creditors as are assets in qualified plans

6. SEP vs. IRA & Defined Contribution Plan Similarities and Differences Provisions Shared With IRAs Employee owns IRA Employee is 100% vested April 15 contribution deadline (but SEP includes extensions) Withdrawals after age 59½ Distributions taxed at ordinary rates Provisions Shared With Defined Contribution Plans 25% employer deduction limit (same as profit sharing plan) Plan may allow SARSEP if established prior to 1997 Coverage tests required Top-heavy rules apply Controlled group, etc. rules apply Integration with Social Security allowed Unique Provisions Special eligibility requirements: (Age 21 and over + Performed service during 3 of the immediately 5 preceding years + Earned at least $550 during the current year) Fully discretionary contributions No forfeitures 8-6

7. SIMPLE IRA Plans Definition Simple IRA plans have the following basic characteristics: Employer establishes a separate IRA for each eligible employee Employees may choose to make salary reduction contributions to their IRA Employer must either make up to a 3% mandatory match or a nonelective contribution equal to 2% of each eligible employee’s compensation All contributions (employer and employee) are 100% vested 8-7

8. SIMPLE IRA Plans Employers Eligible to Establish SIMPLE IRAs All employees (except certain union and nonresident employees) employed during the calendar year are counted for purposes of the 100-employee limit Employers with no more than 100 employees who earned $5,000 or more in compensation during any two preceding calendar years (two-year grace period exception) Employer cannot maintain any of the following retirement plans in which employees accrue benefits: qualified plan, SEP, 403(a) or (b) plan, or government plan (other than a Section 457 government plan) 8-8

9. SIMPLE IRA Plans Employees Eligible to Participate in a SIMPLE IRA Each employee who received at least $5,000 in compensation during any two preceding years AND who is reasonably expected to receive at least $5,000 in compensation during the current year must be eligible to participate in the SIMPLE IRA. Union employees whose retirement benefits were the subject of good-faith bargaining and certain nonresident aliens may be excluded. 8-9

10. SIMPLE IRA Plans Required Employer Contributions to a SIMPLE IRA Plan Match deferrals dollar-for-dollar up to 3% of compensation (or match at a lower rate not less than 1% for two of every 5 years), or Make a 2% nonelective contribution – even if an employee doesn’t make any salary reduction contributions Employer contributions are always 100% vested Employer contributions must be made by the date the employer’s tax return is due (including extensions) Employer contributions are tax deductible 8-10

11. SIMPLE IRA Plans Rules for Employee Contributions to a SIMPLE IRA Deferrals (salary reduction contributions) are allowed up to $12,500 (2015) Catch-up contributions are permitted for employees age 50 and over up to $3,000 (2015) Deferrals are always 100% vested Deferrals are excluded from taxable income, but are taxed as ordinary income when distributed (same as IRA rules) Deferrals must be forwarded to a participant’s SIMPLE IRA no later than the 30th day of the month following the month in which they were withheld from the employee’s paycheck 8-11

12. SIMPLE IRA Plans SIMPLE IRA Enrollment Requirements An employer must notify each employee of his or her right to make salary reduction contributions under the plan and the contribution alternative elected by the employer An employee must be notified and given the opportunity to make or change a salary reduction choice under a SIMPLE IRA plan before the beginning of the election period The election period (60-day period) runs from November 2 to December 31 of the preceding calendar year 8-12

13. SIMPLE IRA Plans 8-13 Advantages The employer’s contributions are tax deductible Employee deferrals reduce their current taxable income The plan is easy to set up using Form 5305–SIMPLE Benefits are totally portable for the employee Participants may pursue many investment possibilities An employer has limited or no investment responsibility Fewer compliance and administrative requirements than traditional pension plans; for example, nondiscrimination tests do not have to be performed Disadvantages Maximum annual contributions (employee and employer) are less than those in a qualified plan An employer who adopts a SIMPLE plan cannot also maintain a qualified plan Employees are immediately fully vested in employer contributions; therefore, forfeitures cannot be used to reduce (i.e., subsidize) employer contributions SIMPLE IRA participants have less protection from nonbankruptcy creditors in certain states

14. SEP vs. SIMPLE SEPSIMPLE Maximum Employee Contribution $0100% of compensation up to $12,500 ($15,500 for individuals age 50 and over) Employer contributions  Discretionary Contributions  Lesser of 25% of compensation or $52,000 (compensation cap applies) Nondiscretionary matching or nonelective contributions Employer eligibility No limit on number of employees Limited to businesses of 100 or fewer employees who earned at least $5,000 the preceding year Employee eligibility  Age 21 and over  Performed service during 3 of the immediately 5 preceding years  Earned at least $550 during the current year  No age requirement  Received at least $5,000 during any two prior years  Reasonably expected to receive $5,000 during the current year Testing and annual filing Not required 8-14

15. SEP vs. SIMPLE SEPSIMPLE Setting upEasy Vesting100% immediately100% immediately, both employer and employee contributions Individual accounts Yes; IRA Investment choices and responsibility Employee 8-15

16. SEP vs. SIMPLE SEPSIMPLE Deadline for establishing and funding Tax due date, including extensions Cannot be established earlier than the first day following the 60-day election period. Generally, must be established by October 1. Salary reduction contributions must be contributed to a financial institution no later than the 30 th day of the month following the month in which amounts would have been paid in cash. Employer matching or nonelective contributions must be made on or before the due date of the employer’s tax return, including extensions. Tax advantages Tax deductibility up to allowed limits (and deferral for SARSEP plans) Tax deductibility up to allowed limits and deferral 8-16

17. Question 1 Which of the following could be disadvantages of a SEP from the employer’s point of view? I.mandatory annual contributions II.statutory eligibility requirements III.$12,500 (indexed) deferral limit in 2015 IV.lack of vesting schedules a.III only b.I and III only c.II and IV only d.II, III, and IV only 8-17

18. Question 2 Which one of the following is not a basic provision of a SEP? a.individual ownership of accounts b.25% limit on employer contributions c.forfeiture reallocations based on compensation d.plan must not discriminate in favor of highly compensated employees 8-18

19. ©2015, College for Financial Planning, all rights reserved. Session 8 End of Slides CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits