The Simplified Employee Pension Individual Retirement Account, also referred to as SEP IRA, is a simple retirement plan that employers and self-employed persons can set up by simply completing IRS Form 5305-SEP and providing a copy to employees. They are attractive to small businesses because they are easy to set up and administer.
Employers can make contributions to employee SEPs on a discretionary basis and receive a tax deduction for those contributions. Employers can decide on a yearly basis whether to contribute to the plan or not. This can be beneficial for new companies or during years of economic downturn. Employers can contribute up to 25% of an employees gross annual salary, capping at $57,000 annually.
The plan is easily established by filing Form 5304-SIMPLE or 5305-SIMPLE, however, an employer cannot have any other retirement plans available.
With the SIMPLE IRA, employers are required to contribute up to 3% of the employees compensation annually. If an employee elects not to contribute to their own account, employers may elect to contribute only up to 2% of compensation.
Employees are 100% vested at the time of contribution, however, they are subject to a 10% penalty if the funds are withdrawn before age 59 1/2 and a 25% penalty if withdrawn within the first two years of participation.