A Simplified Employee Pension (SEP) is a retirement plan that self-employed people should take a look at. To adopt a SEP plan an employer needs to complete IRS Form 5305-SEP. This form is not filed with the IRS; the employer merely keeps it on file.
If you are an employer, you will need to cover all of your eligible employees. Eligible employees are those that:
- Are at least 21 years old
- Have worked for you at least 3 of the last 5 years
- Have earned compensation of at least $450
For all eligible employees, the employer will need to set up a SEP-IRA account at a qualified financial institution. Additionally, all eligible employees must receive a copy of the IRS Form 5305-SEP.
A SEP allows a taxpayer to deduct the lesser of 20% of earned income or $49,000 in 2009 towards their retirement plan.
There are several really nice features of a SEP. Other retirement plans, like a Profit Sharing Plan or 401(k) Plan, need to be adopted and set up in the year you want them to be effective. A SEP Plan, however, allows the taxpayer to set up the plan prior to filing their returns.
Another benefit is that it can be funded anytime up to the due date of the return including extensions. This means individual taxpayers that file an extension have until October 15th to fund their SEP.
Finally, there are no additional reporting requirements with a SEP. With other qualified retirement plans there are annual reporting requirements. For once they were successful in keeping something “Simplified”.
ACTION ITEM: Self-employed people that are looking for an additional tax deduction should consider setting up a SEP.
Thomas F. Scanlon, CPA, CFP ®