# Business and Personal Finance: Simpliﬁed Employee Pensions (SEPs)

## Retirement Plans – Simpliﬁed Employee Pensions (SEPs)

When it comes to simple plans, SEPs also ﬁll the bill. These plans were especially designed for small-business owners, with the goal of making it as pain-free as possible for them to offer retirement beneﬁts. In fact, the only IRS form you have to ﬁll out is Form 5305-SEP, which you can download directly from the IRS Web site at www.irs.gov. Essentially, a SEP is a collection of IRAs, one for each employee and one for you, that together act as a pension plan.

Although part of the selling point of SEPs is that they’re “simpliﬁed,” they can be a little tricky to set up when you have employees (but they are very easy to deal with if the plan is only for you). They’re not as simple as SIMPLE plans, but that’s balanced by a much higher contribution limit. If you’re a sole proprietor with no employees, this could be the best ﬁt for you.

Here are some of the key points you need to know if you’re considering a SEP:

• When it’s just for you, you set up an IRA and say that you want it to be a SEP.
• For 2006, employees can put away 25 percent of compensation (up to $220,000) or$44,000, whichever is less.
• The maximums are a little lower for you as a self-employed individual and involve more math.
• SEPs come with low costs and minimal administrative responsibilities.
• These are the only plans that can be ﬁrst set up after year-end and for which you can ﬁgure out contributions after you know how the year’s proﬁts look.
• SEPs are not very ﬂexible.
• You have to make contributions for all eligible employees, whether they want it or not, even if they leave during the year.
• If an eligible employee doesn’t have an IRA, you have to establish one on his behalf and notify him, even if he doesn’t want one.
• An eligible employee who won’t participate can mess up the tax beneﬁts for everyone else.

You can see why these plans can be great when you have no employees, but sticky when you do. If you are thinking about using a SEP and you have (or plan to have) employees, consider making participation a condition of employment. If a potential hiree doesn’t want to participate, you may be better off not hiring him.

### When You Have Employees

You have to provide all your eligible employees with a bunch of information when you establish a SEP. Each needs a copy of Form 5305-SEP, a statement that says these SEP-IRAs are different from the usual and that also provides an explanation of things, such as how withdrawals work. Plus, you’ll have to provide written notiﬁcation to employees when contributions are made. If it sounds too complicated for you to handle, don’t worry; you can hire a plan administrator who does it all the time and can easily do it all for you.