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Simplified Employee Pension

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A Simplified Employee Pension, or SEP, is a retirement plan often used by small businesses due to its simplicity and low start-up and administration costs. Sole proprietors, partnerships, corporations, and S corps can all set up a Simplified Employee Pension. Simplified Employee Pension accounts can also be set up by the self-employed for their own retirement savings. Simplified Employee Pension accounts allow for tax deferred growth on retirement savings and function much like a traditional IRA. Employers making contributions to employee Simplified Employee Pension accounts can claim a tax deduction on these contributions. Decisions regarding employer contributions to Simplified Employee Pension accounts can be made each year (subject to IRS limits); employers are not locked in to a contribution schedule.

An employer wishing to establish a Simplified Employee Pension plan must follow three steps. First, they must execute an Simplified Employee Pension agreement (e.g. a SEP IRS model - Form 5305-SEP, a IRS approved prototype SEP, or an individually designed SEP). Second, they must provide information about the Simplified Employee Pension plan to employees. And last, employers must ensure that a Simplified Employee Pension IRA account is set up for each eligible employee. Simplified Employee Pension IRA accounts are typically set up by the employee.

Employees are considered eligible for participation in a Simplified Employee Pension plan if they are at least 21 years of age and have performed services for the employer in at least 3 of the last 5 years. All employees considered eligible in a Simplified Employee Pension must participate. Discretion over the investments in employee accounts is retained by the employees themselves. Employees are 100% vested in all contributions into their Simplified Employee Pension accounts immediately.

For more information on Simplified Employee Pension plans please see IRS publication 560.

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