What Are the Advantages of Simplified Employee Pension Plans?

Simplified employee pension (SEP) plans enable businesses to provide retirement benefits with lower costs and less reporting requirements than other qualified retirement plans.

SEPs offer some attractive benefits for employers and employees alike.

How Do SEPs Work?

A simplified employee pension plan is basically a group of individual retirement accounts or annuities maintained for employees.

Under a typical SEP plan, the employer establishes IRAs for all participating employees. The employer then contributes to the IRAs, subject to the contribution limits for SEPs — not IRAs. Employer contributions are limited to 25 percent of an employee’s salary, up to $44,000 per year. The company’s contributions are not counted as current income for the employee.

SEP plans provide an effective retirement planning option for employees. They also provide the employer with an effective tax advantage.

Advantages

SEPs are designed to provide a number of advantages.

They have a significantly lower setup cost to the employer than regular pension or profit-sharing plans. They also offer simpler reporting and record-keeping requirements.

For employees, SEPs offer substantially higher contribution limits than regular IRAs. This enables employees to accumulate more for retirement.

The retirement benefits in a SEP are fully vested as soon as they are contributed. This makes a SEP completely portable. That means departing employees can roll their SEP balances into an IRA or have them transferred to a retirement plan sponsored by their new employer.

Simplified employee pensions can provide significant retirement benefits to employees while minimizing setup and administrative costs for employers.

This material was written and prepared by Emerald Publications.

GE 37901 (02/07)