As an employer, you can play a major role in helping your employees save for their retirement by setting up a retirement plan. Not only will having a retirement plan help your employees save for the future but it may also help you attract and keep qualified employees. An added bonus is that retirement plans offer tax savings to your business.
One type of retirement account is a simplified employee pension plan, or SEP. A SEP is an Individual Retirement Account (IRA)-based plan that's easy to set up. SEPs have low start-up and operating costs. Also, you can decide how much to put into a SEP each year, which gives you some flexibility when business conditions vary.
Any employer (sole proprietor, partnership, limited liability company, corporation and so forth) having one or more employees may establish a SEP. SEPs are funded by employer contributions that are deposited to employees' IRAs.
SEPs must be part of a written arrangement, and may be adopted using IRS Form 5305-SEP (also known as the Simplified Employee Pension-Individual Retirement Accounts Contribution Agreement), the model form issued by the Internal Revenue Service (IRS), or an equivalent document provided by an IRA trustee or custodian.
Setting Up the Plan
Banks, mutual fund companies and other financial institutions can help employers establish a SEP. Just a few steps are involved in setting up a SEP. You'll need to:
- Choose a SEP document
- Complete and sign the form
- Give a copy of the plan document to employees
Choosing a SEP Document
To set up a SEP for your employees, you first need to contact a retirement plan professional or a representative of a financial institution that offers retirement plans. You will need to choose a plan that is offered by the financial institution, such as the Form 5305-SEP, IRS model SEP or another plan document.
A SEP IRA must be established for each eligible employee. An eligible employee is one who is at least 21 years old, has been employed by you for at least three of the last five years and had compensation from you of at least $500 for 2008 and $550 for 2009. This amount can be adjusted for inflation in future years.
You may establish a SEP as late as the due date of your company's income tax return for the year that you want to establish the plan.
Complete and Sign Form
After you have selected your SEP document, you will need to complete and sign it. Your completed form is your plan's basic legal document that describes employees' rights and benefits. The document will include your company name, the requirements for employee participation, the signature of a responsible official and a written allocation formula for the employer's contribution.
Copy to Employees
The last step involved in setting up your SEP is to give your employees a copy of the plan document and its instructions along with information about SEP IRAs. The IRS model SEP plan is not considered adopted until each employee has a written statement explaining:
- A SEP IRA may provide different rates of return and contain different terms than other IRAs the employee may have
- The administrator of the SEP will provide a copy of any amendment within 30 days of the effective date, along with a written explanation of its effects
- Participating employees will receive a written report of employer contributions made to SEP IRAs by January 31 of the following year
Once your SEP is set up, it is very easy to operate. Your trustee will take care of depositing the contributions, investments, annual statements and any required filings with the IRS. Your obligation is to forward contributions to your financial institution or trustee for those employees
who participate as described in your plan document.
Questions for Your Attorney
- Am I required to make a contribution to a SEP IRA for myself?
- What is the difference between the Form 5305-SEP and the IRS model SEP?
- After I establish a SEP, do I need to make contributions every year?