SEP IRAs a step up from some other plans

Simplified employee pension plan, or SEP

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Small-business retirement plans

Simplified employee pension plan, or SEP

From the employee’s perspective, a SEP plan is an improvement over the payroll deduction individual retirement account plan because only the employer contributes to the traditional IRAs, called SEP IRAs, that are set up for the workers. The employee doesn’t contribute any money to the SEP. All businesses as well as the self-employed can establish a SEP. There is no annual return for the employer to file, no nondiscrimination testing standards to meet, and the contributions are invested in IRAs.

The company can also use the Internal Revenue Service model form as its plan document.

The employer can decide each year whether and how much to contribute to the SEP. For 2012, contributions to an employee’s SEP cannot exceed the lesser of 25 percent of the employee’s compensation or $50,000. Elective deferrals and catch-up contributions are not allowed in SEP plans.

After deciding on the financial institution that will serve as the trustee for the employees’ SEP IRAs, there are three steps to establishing a SEP: execute a written agreement to provide benefits to all eligible employees, give employees the required information about the agreement, and set up an IRA for each employee.