A simplified employee pension (SEP) is an individual retirement plan (IRA) that is a financial vehicle intended to accumulate funds as you prepare for your retirement years. It is one of the simplest plans to use, the Internal Revenue Service says. Contributions can be made by your employer, or by you of you are self-employed. The SEP-IRA subject area is heavily regulated by the Internal Revenue Service (IRS.
Plan Information Requirement
IRS Publication 4285 (SEP Checklist) and Publication 560 (Retirement Plans for Small Business) both say your employer is required to make available all applicable information regarding its SEP plan for eligible employees. You must receive a copy of the IRS form your employer used to set up its SEP plan, usually Form 5305-SEP and its instructions. Other information required to be available includes distributions, eligibility and contribution details.
Contributions
The IRS requires that yYour employer be timely contributions into its SEP IRA plan. To receive a tax deductions, your employer must make its contributions by the due date of its federal income tax return. If the due date has been extended, your employer has until this date to make its SEP contribution. If a contribution is made after the due date, the contribution will be applied to the following plan year, thereby deferring the tax benefit.
The IRS states that your employer's contributions to your SEP are required to not be dependent or contingent upon any event happening. The contribution must be made to your account regardless of other circumstances.
Employer contributions must comply with IRS requirements regarding amounts, timing and compensation rules as set forth in IRS Publication 960. The contributions must be in cash, money order or check. Property contributions are not allowed in an SEP. According to the IRS, contributions are limited to the lesser of "25% of the employee's compensation" or $49,000 as of 2009.
Plan Ownership
Once your employer makes a contribution into your SEP account, the funds belong to you. The IRS requires that "employer contributions are immediately 100% invested" to qualify for participation in any SEP plan. According to the IRS, you maintain ownership of your SEP IRA plan, not your employer.
Employee Eligibility
To become a participant in an SEP IRA plan, the IRS requires you be an eligible employee. First, according to the IRS, an eligible employee must make at least $500 compensation for the year involved. This amount can be adjusted for cost-of-living adjustments. The second requirement stipulates the employee must have worked for the employer for at least three out of five preceding years. The third requirement states the eligible employee must be at least 21 years old.
References
- J.K. Lasser's Your Income Tax 2009; Barbara Weltman; 2008
- Internal Revenue Service: Publication 560
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