Simplified Employee Pensions (SEPs)
A simplified employee pension (SEP) is a written arrangement
that allows an employer to make contributions toward his or her own
and employees' retirement without becoming involved in more complex
retirement plans. The contributions are made to special IRAs (SEP-IRA)
set up for each individual qualifying employee.
An employer
can use IRS Form 5305-SEP to satisfy the written arrangement requirement
for a SEP. A SEP can be established at any time during the year, or
up to the due date of the tax return for the year (including extensions).
Contributions to the SEP for a given year must be made by the due
date of the income tax return, including any extensions, for that
tax year.
Establishing a retirement plan for yourself, and
your employees if you have any, is one of the few tax reduction strategies
that you can use after the tax year ends.
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Save Money Contributions that you make on behalf
of your employees will lower your Schedule C income, and contributions
you make to your own account will lower your adjusted gross income
on your Form 1040. |
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If you have a SEP plan in place, you don't have to make
any contributions to the plan in any given year. But, if you do make
contributions for a year, the contributions must be based on a written
allocation formula (for example, "2 percent of each employee's pay")
and must not discriminate in favor of highly compensated employees.
For
2014, the SEP rules permit an employer to contribute, and deduct,
an annual maximum of 25 percent of the employee's compensation or
$52,000, whichever is less, to each participating employee's account.
You can contribute the same amount for your own plan. However, for
the business owner, the deduction allowed for the contribution is
lower. The business owner's maximum deduction is the net earnings
of the business, minus the deduction for one-half the self-employment
tax, and minus your contribution to the plan.
Prior to 1997,
an employer could establish a Salary Reduction Arrangement SEP (SARSEP)
under which employees could elect to make contributions out of their
own pay, up to a certain dollar limit per year, per employee. This
choice is called an elective deferral. Although new SARSEPs can no
longer be set up, you may continue to make contributions to a SARSEP
that was established before 1997. The dollar limit for each employee's
annual elective deferrals is the lesser of:
- 25 percent of the participant's compensation, or
- $17,500 ($23,000 if the participate is age 50 or older) for 2014;
$18,000 ($24,000 if the participant is age 50 or older) for 2015
This is a combined limit: it applies to contributions
to a SEP and any of the following:
- 401(k) plans
- 403(b) salary reduction plans, and
- SIMPLE IRA plans
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Work Smart If you want to set up a retirement
plan that includes a salary reduction component like the SARSEP provided,
you may be able to set up a SIMPLE 401(k) plan or a qualified 401(k)
plan to accomplish this. While the qualified 401(k) plan permits
greater contributions, it is far more difficult to establish and maintain
and is subject to far more stringent reporting and administrative
requirements. |
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