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Setting Up a SEP Plan

A SEP plan is an employer-established plan.

Employees can neither set up a SEP nor make their own contributions to it. Only you, as the business owner/employer, may set up a SEP Plan and make plan contributions.

If you have no employees, you can set up a SEP for yourself.

Three Steps to Setting Up a SEP

  • STEP 1: Formal Written Agreement:
    • You must execute a formal written agreement to provide benefits to all eligible employees, including yourself if you're self-employed.
  • STEP 2: Provide Information to Employees:
    • You must give each eligible employee certain information about the SEP.
  • STEP 3: Set Up Traditional SEP-IRA Accounts:
    • Once the SEP Plan is established you set up a traditional SEP-IRA for each eligible employee, including yourself as the business owner.
    • Employees may set up their own SEP-IRA account at a qualified financial institution.
      • Roth IRAs are not permitted.

STEP 1: Formal Written Agreement

Under a SEP, you, as the employer must:

  • Execute a formal written agreement to provide benefits to all eligible employees.
  • You may also exclude certain individuals.

How to satisfy the written agreement requirement:

You can satisfy the written agreement requirement and establish a SEP plan by using IRS approved Form 5305-SEP, Simplified Employee Pension -Individual Retirement Accounts Contribution Agreement.

Keep Form 5305-SEP with your records; do no file it with the IRS.

Advantage of using Form 5305-SEP:

  • No IRS approval required
  • No IRS determination letter required.
  • Annual filing of retirement plan information returns with the IRS and Department of Labor usually not required. (See Form 5305-SEP instructions).

Do not use Form 5305-SEP if any of the following are true:

  • You currently maintain any other qualified retirement plan.
  • You have eligible employees for whom IRAs have not been set up.
  • You use the services of leased employees.
  • You are a member of any of the following (unless all eligible employees of all the members of these groups, trades, or businesses participate under the SEP):
    • An affiliated service group (Section 414(m))
    • A controlled group of corporations (Section 414(b))
    • Trades or business under common control (Section 414(c))
  • You do not pay the cost of the SEP contributions.

Employees Eligible to Participate in a SEP:

An eligible employee must meet three requirements:

  • Has reached age 21.
  • Has worked for you in at least 3 of the last 5 years.
  • Has received at least $550 in compensation from you in tax year 2012.

Tip: You can use less restrictive participation requirements than those listed, but not more restrictive ones.

Excludible Employees:

You can exclude the following employees from coverage under a SEP:

  • Employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you.
  • Nonresident alien employees who have received no U.S. source wages, salaries or other personal services compensation from you.

SEP: Step 2 - Provide Information to Eligible Employees

You must give each eligible employee the following information:

  • A copy of Form 5305-SEP
  • Form 5305-SEP instructions
  • The other information listed in Form 5305-SEP instructions.

Caution! An IRS model SEP is not considered adopted until you give each employee this information.

STEP 3: Set Up Traditional SEP-IRA Accounts

Self-employed persons:

Once the SEP plan is established, set up a traditional SEP-IRA account for yourself at a qualified financial institution.

The financial institution will help you set up a SEP plan.

Employees:

If you have employees, a SEP-IRA account must be set up by or for employees at a qualified financial institution to receive employer contributions.

Type of IRA:

A SEP-IRA must be set up as a traditional IRA; it cannot be set up as a Roth IRA.

Roth IRAs: Employer contributions to a SEP-IRA will not affect the amount an individual can contribute to his own Roth IRA.

Where to set up SEP-IRA accounts:

SEP-IRAs can be set up with banks, insurance companies, and other qualified financial institutions.

Contributions are sent to the financial institution where the SEP-IRA is maintained.

Deadline:

You can set up a SEP and make deductible contributions for a particular year as late as the due date of your return (including extensions) for that year.

For example, if you want to set up a SEP for calendar year 2012, you have until April 15, 2013 (including extensions) to establish the SEP and make deductible contributions.

Reminder:

A SEP plan is an employer-established plan. Employees are permitted to set up a SEP or make their own contributions to it.

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