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• Simplified
Employee Pension (SEP)
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Simple IRA
•
Profit Sharing
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Age-weighted/comparablility profit
sharing plans
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401(k) profit sharing
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Safe-harbor 401(k)
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Owner only/one-person 401(k)
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Defined benefit pension |
Simplified Employee Pension (SEP) Plans
A SEP plan is easy to set up. It is comparable to an employer establishing
and funding a “company provided IRA” for the benefit of
each employee. There are no requirements for a separate employer trust
document and administrative costs are minimal. Employers sponsoring
SEP plans are not required to file annual plan returns (Form 5500)
like those employers sponsoring qualified pension or profit sharing
plans. In addition, the SEP plan offers tax planning and contribution
flexibility. An employer can establish a SEP plan up until its tax-filing
deadline, unlike qualified pension or profit sharing plans, which
must be in place no later than the last day of the plan year.
Eligibility
An employer maintaining a SIMPLE plan may not maintain any other qualified
plan in which the employees currently receive benefits. An eligible
employer is defined as having 100 or fewer employees. Employees must
be eligible if they receive at least $5,000 in compensation during
any two preceding years and are expected to earn at least $5,000 in
the current year. A less restrictive eligibility requirement may be
utilized. There are no minimum participation requirements.
Contributions
Employees may defer up to $10,000 (indexed for 2006), with no set
maximum percentage of compensation. 2The employer
must make a mandatory contribution as either a matching dollar-for-dollar
contribution on the first 3% elective deferral or a 2% uniform contribution
to all eligible employees, regardless of whether they made an elective
deferral. (The employer can elect a lower matching contribution in
two out of five consecutive years.)
Advantages
A SIMPLE plan is not subject to non-discrimination tests or top-heavy
requirements. If the SIMPLE IRA format is used, there is no requirement
to file a Form 5500. As a result, there are minimal plan administration
costs, and highly paid or owner-employees are not restricted in their
ability to defer as a result of low participation by the lower-paid
employees.
2Employees age 50 and older may make a catch-up
contribution of $2000 for 2006.
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