A Simplified Employee Pension Plan May be the Retirement Answer You Need

A Simplified Employee Pension Plan May be the Retirement Answer You Need

If you are like most small business owners, the end of 2015 probably flew by while you were busy addressing your clients’ last-minute needs or trying to close out your books. With little time to think about establishing or making contributions into a retirement plan in those closing days, a Keogh plan or 401K may simply not be a good fit for your business. The good news is that the hustle and bustle of year-end activity does not preclude you from contributing to your own retirement – it just makes a Simplified Employee Pension Plan (SEP) a very good choice.

What is a SEP IRA?

A SEP goes by the name “simplified” for a number of reasons. For one thing, rather than putting you into the position of having to take on the administrative duties required by other retirement plans, with a SEP the contributions are placed in an IRA account. This is true whether the participant is you or an employee. The contributions are tax deductible, with the maximum contribution for an employee being either $53,000 or 25% of the employee’s compensation, whichever is lower, and these contributions are not subject to FICA or income tax withholding. As a self-employed individual you are held to the same limit of either $53,000 or 25% of compensation, whichever is lower, and the 25% ends up being the equivalent of 20% of the business’ net profit. As long as you as employer do not exceed the maximum contribution for the year, you can adjust the compensation percentage for your employees to whatever percentage works best for you each year, depending upon how the business performed.

Why Choose a SEP IRA?

Choosing a SEP for your retirement planning makes a great deal of sense both for new businesses and for those who are unable to reliably predict what their income level will be each year. It is a more conservative way of approaching retirement savings then committing to the contribution matches that are associated with other types of plans. Those businesses that consist only of the owner are able to make determinations on what percentage to contribute based upon how well the business did, taking advantage of the maximum in high income years while making smaller contributions in years where income was tight.

Once deciding to establish a SEP, there are certain requirements for making contributions for employees. Contributions most be provided for all employees who have worked for the company for three of the last five calendar years; who received at least $600 in compensation and who are at least 21 years old. Exceptions to these rules apply for those workers who fall under a collective bargaining agreement.

Much like traditional IRAs, those who have a SEP IRA are required to begin taking required minimum distributions from their account when they reach the age of 70 ½. However, unlike those non-SEP IRAs, there is no requirement that contributions have to stop being made. The distributions that are taken are subject to the same 10% early withdrawal penalty as is true for other qualified plans if funds are taken out before the age of 59 ½.

Next Steps

Setting up a SEP plan is fairly straightforward, and the steps are spelled out on IRS Form 5305-SEP. The form does not need to be filed with the agency, but business owners should retain a copy of the form for their records. Your financial institution likely offers the opportunity to set up a SEP-IRA plan, and doing so may provide you with the confidence that all of the requirements demanded by the institution are met. There may also be advantages with regards to the fees involved, and it is always a good idea to familiarize yourself with those charges before going forward with establishing an account.

If you believe that a SEP is a good solution for your business’ retirement plan needs and would like more information on setting one up, contact Evelyn Hsu CPA. We will review your options and help you determine what works best for you.




Find the best tax & accounting professional for me!

You are moments away from finding just the right professional for you.


Follow us for fresh tax news.

Thousands of people already have.

List Your Business

  • Step 1

    Find your business in the directory.
  • Step 2

    Click the "CLAIM THIS LISTING" link below the profile photo.

If your company is not in the directory, CLICK HERE

Enter your company information