There's Still a Place for SEP IRAs

Simplified Employee Pension plans, or SEPs, offer small businesses an easy, low-cost alternative to traditional pension plans. A SEP is a retirement plan that may be adopted by any business entity including sole proprietors, partnerships, S-corporations, fully incorporated businesses, or Limited Liability Companies (LLCs).

Since a SEP is an employer-provided plan, it has traditionally worked well for small businesses with few to no employees other than the owners. Under a SEP arrangement, the employer makes discretionary contributions to the Individual Retirement Accounts (IRAs) of each eligible employee, including the owners. Contributions are generally deductible when made and may range from zero to 25 percent of pay.

To avoid discrimination, contributions must be made to all employees meeting specific eligibility requirements. These requirements include minimums for age, wage, and length of service. Age and wage minimums are 21 years of age and $450 of earned income during any plan year. Length of service is defined as having worked for the employer for three of the preceding five plan years.

As for administration, SEPs are exempt from many reporting and disclosure requirements that apply to most other retirement plans, such as Form 5500 filings. Further, SEPs can be established and funded as late as your tax filing deadline including extensions.

SEPs do, however, have their limitations. Since 1997, rules for SEPs allow only employer contributions. Thus, as a business grows, as more employees become eligible, or as the employees and owners wish to defer some of their own income, these same companies may wish to consider 401(k) plans.

Under a 401(k) plan, employees may defer $12,000 of their current year, 2003, salary into the plan, $14,000 if age 50 or older. Ownership of the company may view this amount as an addition to company contributions or as a partial offset to its contribution since company contributions are required to be made for every eligible participant in the plan.

Having a 401(k) will require ERISA responsibility and filing requirements. Companies adopting such plans also need to establish them prior to their tax year-end. Salary deferrals must be made within this time frame as well; however, the employer contribution portion may still be made as late as the company's filing date including extensions.

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