A Simplified Employee Pension IRA (SEP) provides an employer with a simplified way of making contributions to an employee’s retirement account. Contributions are tax deductible to the employer, are not currently taxable to the employee and any earnings accumulate income tax-deferred.
No annual contribution is required by the employer but if a contribution is made it must be the same percentage of compensation for all eligible employees. The annual employer contribution limit for 2010 is the lesser of 25% of compensation or $49,000. For the self-employed, the limit is 20% of compensation and $49,000. Contributions must be always 100% vested. Any employee who is at least 21 years old and has worked for the company in at least three of the last five calendar years must be permitted to participate.
Among the advantages to the employer:
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Contributions are tax-deductible
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Contributions and costs are flexible
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Reporting is minimal – no IRS or Department of Labor forms
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Little or no administrative expense
Among the advantages to the employee:
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Participant has the right to direct investments
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Annual contributions are not currently taxed to the participant
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Earnings on the account are not currently taxed to the participant
Among the disadvantages to the employer:
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Contributions must be made for part-time and seasonal employees
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Employees are always 100% vested
Among the disadvantages to the employee:
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No guarantee as to future benefits
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Investment risks rest on the participant
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No assurance as to the frequency and amount of employer contributions
