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Simplified Employee Pension Plans (SEP IRAs)

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Employers looking for a low-cost, easy-to-administer employer-sponsored retirement plan ought to consider the plans available under the IRS IRA code sections.

A simplified employee pension (SEP) plan is an individual retirement account to which employers can contribute. Employees with retirement benefits already established by union agreements may not participate in SEP IRAs. Other employees may participate if they meet the following qualifications:

They are at least 21.
They have performed services for their company for at least three years during the immediately preceding five years.
They have received from their employer at least $500 in annual compensation (2007/2008) in at least three of the immediately preceding five years.

An employer can establish less restrictive participation requirements for its employees than those listed, but not more restrictive ones.

The SEP rules permit an employer to contribute (and deduct) each year to each participating employee's SEP-IRA up to 25 percent of the employee's compensation or $46,000 for 2008 (up from $45,000 for 2007), whichever is less.

An employer who signs a SEP agreement does not have to make any contribution to the SEP IRAs that are set up. But, if the employer does make contributions, the contributions must be based on a written allocation formula and must not discriminate in favor of highly compensated employees.