Simplified Employee Pension Plans For Small Businesses

The Simplified Employee Pension Plan, or SEP IRA, is a small-business retirement plan that’s easy to set up. The employer offers eligible employees a SEP IRA account, and then contributes an amount up to 25 percent of each employee’s compensation each year. Only the employer contributes money; employee contributions are not allowed. The employer does not have to contribute money each year, which is a nice bit of flexibility for those times when business isn’t great. In fact, employers do not ever have to contribute to these plans, although employers that do not intend on making contributions should consider offering a different type of plan.

According to the IRS, if an employer offers a SEP plan, it must be available to all employees who are at least 21 years old and who have worked for the company for three of the preceding five years. Employers have the option to offer the plan to more people; for example, all employees with at least one year of service.

The employer can deduct all of the contributions made to the plan, and it is not considered to be taxable income to the employees (although employees will owe taxes when they take withdrawals from their accounts). Any investment earnings are tax-deferred until withdrawal, too.

The SEP plan is easy to operate. It’s a tax-deductible way for small-business owners to attract and retain employees while also saving for their own retirement; after all, the owner is generally an eligible participant.