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• Established by Congress to encourage businesses to set-up a retirement
plan, including a one-person business
• Supplement to Social Security and any Private or Governmental pension
plan
• 1978
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A Sep IRA is a traditional IRA to which an employer has made a SEP
Contribution
The Sep-IRA
Distributions
Accountholder
Before Age 59½
Age 59½ to 70½ and
older
Beneficiaries
Original
Subsequent
In general, the
accountholder or
beneficiary will include
the distribution in
income and pay tax.
0 – 25% x Compensation
Maximums 2013 - $51,000
2014 - $52,000
2015 - $53,000
2016 - $53,000
2017 - $54,000
Employer SEP-IRA
Contributions
Excluded from an
employee’s income
Custodial or Trust
Account Earnings
within Account
are not Taxed
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Types of IRAs
• Traditional IRAs – An individual IRA
• SEP IRAs – An employer plan IRA, including a one-person business. Uses
a traditional IRA to handle the investments
• SIMPLE IRAs – An employer plan IRA, including a one-person business
• Roth IRAs – An individual IRA
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Types of SEPs
• Regular
• 1 Person
• 2-10 Employees
• 10-99 Employees
• 100 and over Employees
• SAR-SEPs
• In general, repealed but certain plans grand-fathered. (1997)
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Who Can Establish a SEP?
SEPs are established by owners of businesses, including incorporated and
unincorporated businesses, sole proprietors, and partnerships. All employees who
meet the eligibility requirements established by the employer when the plan was
adopted must be included in the plan.
Sole Proprietors - While SEPs are often established by employers with
numerous employees, these plans can also be used by a self-employed
individual where that person is the only participant in the plan. A sole owner for
purposes of the SEP rules is both an employee (actually an owner-employee
since he owns more than 10% of his business) and an employer. As an
employee of the sole proprietorship, he may participate in a SEP. As an
employer (the sole proprietor) he can make employer contributions to the SEP.
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Who Can Establish a SEP?
SEPs are established by owners of businesses, including incorporated and
unincorporated businesses, sole proprietors, and partnerships. All employees who
meet the eligibility requirements established by the employer when the plan was
adopted must be included in the plan.
Partnerships - In the case of a partnership, a partner who is an owner-
employer, may, as an employee of the partnership, participate in a SEP, and
the partnership entity, as the employer, would contribute to the SEP. The
partnership should pass a formal resolution evidencing their intent to adopt a
SEP plan. This resolution should be in writing and be kept with all other
partnership business records.
Note: If a partnership established a SEP for the benefit of its employees, and
the partnership terminated and was thereafter run as a sole proprietorship,
continued employer contributions to the partnership SEP are not permitted. The
IRS reasons that since the partnership established the SEP only for its
employees, contributions to the SEP made by the sole proprietors could not be
contributions to partnership employees. If the new sole proprietor wishes to
continue to have a SEP plan, the employer would have to adopt a new SEP
plan agreement in their new employer capacity.
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Who Can Establish a SEP?
SEPs are established by owners of businesses, including incorporated and
unincorporated businesses, sole proprietors, and partnerships. All employees who
meet the eligibility requirements established by the employer when the plan was
adopted must be included in the plan.
Corporations - A corporation can also adopt a SEP plan. There is no limitation
on the size of the corporation that adopts the SEP plan. The corporate board of
directors should pass a corporate resolution stating the corporation’s intention to
adopt a SEP plan. This again needs to be documented in writing and retained
with all other corporate business records.
Non-Profit Corporations - Even non-profit corporations can establish SEPs.
SAR-SEPs were not available to non-profits, however.
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Business Goals of Offering SEP Services
1. Large cash deposits
2. New client relationship may be created
3. Existing client relationship may be expanded or strengthened.
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SEP Statistics / Data
1. The percentage begin contributed to each type of IRA has been quite consistent
for the five years or 2004 – 2008 as follows:
2. End-of-Year Fair Market Value 2008
Number of Tax
Payers
FMV Value Percent
Traditional 43,054,097 $3,257,294,689 88.49%
SEP 3,726,835 $201,497,706 5.47%
SIMPLE 2,896,031 $45,634,790 1.24%
Roth 15,951,065 $176,638,800 4.80%
Total 54,497,580 $3,681,065,985 100.00%
IRA Type Percent
Roth IRAs 32.10%
SEP-IRAs 27.00%
Traditional IRAs 24.90%
SIMPLE-IRAs 16.00%
Total 100.00%
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____ 4.8 Trillion
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SEP Statistics / Data
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SEP Statistics / Data
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Tax Benefits of a SEP-IRA
• Tax deferred income. Compounding Growth.
• Contribution is Excludable from Income for numerous taxes: Income, Social
Security, Unemployment, etc.
Example – Betsy Ryan * Wage Income $30,000
SEP Contribution (0-25%) $6,000 (20%)
“Total” Compensation $36,000
*Taxes apply to the $30,000, but not to the $6,000.
Taxes means income, social security, Medicare and
unemployment.
* Betsy is an employee. A special calculation applies
for a self-employed individual.
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Establishing a SEP
1. Employer signs a SEP plan document
a. IRS Model Form 5305-SEP
b. SEP Prototype, or
c. Customized SEP Document – Prohibitively expensive
2. Each eligible employee, including an employee who is the only employee, must
establish a traditional IRA (a SEP IRA).
Employer has authority to sign on behalf of an employee who refuses to sign.
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Types of SEP Plan Documents
To establish a SEP, the employer must execute a SEP plan document by the
deadline for filing the business tax return, including extensions. (Treasury Regulation
section 16.408-7) The type of SEP plan the employer executes or adopts may vary,
as SEP plans may be adopted using the IRS Form 5305-SEP (the IRS model SEP
form), a prototype SEP, or an individually-designed SEP. (The IRS also provides a
model salary-deferral SEP plan, Form 5305-A SEP, however, new SAR-SEPs can no
longer be adopted.) The following material discusses some of the features of these
different SEP plans.
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IRS Form 5305-SEP
A financial institution should, at a minimum, have the IRS Model Form 5305-SEP
available. This form may be obtained at no charge from the IRS, or at a nominal fee
from most forms vendors, such as Collin W. Fritz and Associates. The actual plan
document form is very short and very easy to complete. The portion of the document
to be completed is set forth below.
*
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Financial institutions should note that the customer has responsibility for accuracy. If
customer uncertainty exists, consultation with his or her tax advisor may be
warranted. Although the customer bears ultimate responsibility for completing these
forms, it’s relatively easy for a financial institution to provide basic assistance, and
therefore reap the benefits of maintaining their SEP account. Filling out the Form
5305-SEP is easy: A. Fill out the name of the business (blank #1);
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B. Define minimum age for plan participation (blank #2). This is usually 21, or
could be N/A (not applicable) if a one-person business;
C. Set years-of-service requirement (blank #3). This is commonly three years. But
remember that for new businesses a contribution can’t be made until the
requirement is met. N/A may also apply here;
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D. Indicate whether or not the plan will include union employees (blank #4). Most
will not;
E. Indicate whether or not the plan will include non-resident aliens (blank #5). Most
will not,
F. Indicate whether or not the plan will include employees earnings less than $450
for the current year (blank #6). Most will not;
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SEP Limits for 2013 - 2016
2013
2014
2015 & 2016
2017
Maximum Contribution Per Individual $51,000 $52,000 $53,000 $54,000
Required Compensation for Current Year $550 $550 $600 $600
Maximum Compensation which may be
used
$255,000 $260,000 $265,000 $270,00
0
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G. The employer signs and dates the plan. A copy of the completed plan must be
provided to all employees. A completed copy should be retained by the financial
Institution.
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Few plans are simpler to open. If a SEP plan is unavailable to employees, an IRA
custodian/trustee cannot accept deposits in excess of the annual limits of
$5,500/$6,500 as applicable, unless the contribution is a rollover. A signed copy of
Form 5305-SEP is sufficient verification to accept such a contribution.
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Although many businesses can use IRS Form 5305-SEP, certain employers cannot,
including the following:
• An employer who currently maintains any other retirement plan. Note that this
restriction prevents an employer who has a QP/Keogh plan from using the IRS
Model Form 5305-SEP as the SEP plan document. A SEP prototype, however,
could be used. This restriction does not apply if there are two different
employers.
Example: If a person working for John Deere, Inc. participates in the company’s
profit sharing plan, and this person also farms, then he or she may establish a
SEP for their farm income. As an employer, this person only has one plan—the
SEP. As an employee, he/she participates in two plans. This participation does
not disqualify use of the IRS 5305-SEP form.
• An employer who now, or who has ever, maintained a defined-benefit plan.
• An employer who has any eligible employees for whom IRAs have not been
established.
• An employer who uses the services of leased employees (as described in Code
section 414(n)).
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Although many businesses can use IRS Form 5305-SEP, certain employers cannot,
including the following:
• An employer who is a member of an affiliated service group (as described in
section 414(m)), a controlled group of corporations (as described in section
414(b)), or trades or businesses under common control (as described in section
414(c)), UNLESS all eligible employees of all the members of such groups,
trades, or businesses, participate under the SEP.
• The 5305-SEP form should only be used if the employer will pay the cost of the
SEP contributions. This form is not suitable for a SEP that provides for
contributions at the election of the employee whether or not made pursuant to a
salary-reduction agreement.
These limits do not apply to employers who adopt either a prototype SEP or an
individually-designed SEP. For example, even though an employer already has a
Keogh plan, he could adopt a SEP plan if he adopted a prototype or individually-
designed SEP.
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Prototype SEPs
Probably the second most widely used SEP plans are prototype SEPs. Prototype
SEPs are specially designed and drafted plans, typically provided by attorneys and
pension consulting firms. These SEP plans offer all the features of the basic Form
5305-SEP and some additional features which simply are not available with the IRS
SEP document. Prototypes are typically submitted to the IRS for approval. This
means that the form of the plan meets the requirements for a SEP established in the
Internal Revenue Code and Treasury Regulations. Because of this special drafting
and submission to the IRS, prototypes have administrative expenses which either the
financial institution or the adopting employer must absorb. Prototypes can offer
several benefits which are not included in Model SEPs. These benefits are discussed
later.
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Individually-Designed SEP Plans
Certainly the least common of the different types of SEP plans, the individually-
designed SEP is—as it sounds—individually designed for a particular employer. This
is almost certain to be considerably more expensive than a prototype SEP, as the
drafter, probably an attorney, must bill many hours of work to one employer. Social
Security integration is permissible with the individually-designed SEP, if this feature is
provided for in the plan. However, rather than incurring this expense for a
nonqualified plan, employers are probably going to get more plan for their pension
dollar by using either a prototype SEP or a qualified plan.
Cost prohibitive IRS filing Fee.
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The Role of the Financial Institution
Important Determination – Are you servicing the employer and the
employee or just an employee? In some cases you will be servicing a
person who works for a company which sponsors a SEP. You may have no
relationship with the employer. An employer is required to furnish a copy of
its SEP plan to every eligible employee. You will want to ask your customer
to furnish you with a copy also. Be aware of section 1.12 of Article VIII
which reads as follows:
Special Terms Regarding SEP-IRA Contributions. Your IRA may accept
SEP-IRA contributions which are made either by your employer or, if you are
self-employed, by yourself. You hereby acknowledge that we have no
responsibility or duty to determine your eligibility for such contributions or the
correctness of the contribution amount. This is true even if we furnished you a
copy of the IRS model Form 5305-SEP or Form 5305A-SEP or SEP prototype.
You also acknowledge that you could well have excess IRA contributions if your
employer (or you, as the employer) makes a mistake as to which employees of
the sponsoring business are entitled to be allocated a share of the employer
contribution and the amount of each allocation. Other administrative errors
could also occur. Therefore, you agree to hold us harmless with respect to any
and all adverse tax consequences (e.g. excess contributions) which arise or
may arise as a result of your employer (or you, as the employer) making such
administrative error(s).
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The Role of the Financial Institution
General approach — the employer will look to a financial institution to
provide a SEP plan document. A financial institution that is considering
entering the SEP market needs to decide what type of SEP plan document
they will make available to their employer customers and what role the
institution will play in the administration of the SEP plan.
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The Role of the Financial Institution
Most financial institutions will not want to render administrative services.
Most financial institutions choose to limit their role to being the IRA
custodian. This is true for both one-person businesses and businesses with
more than one person. Some institutions may choose to render
administrative services.
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The Role of the Financial Institution
We strongly recommend that the institution at which the employer
establishes the SEP plan use a SEP service agreement. The purpose of the
agreement is to make clear to the customer exactly what your financial
institution will do and to make clear the fact that your institution does not
have the duty to make sure the business customer is administering the SEP
correctly.
A sample service agreement follows.
The IRA custodian/trustee does have the duty to prepare the Form 5498
and Form 1099-R with respect to SEPs. Since 1996, there has been a
check box added to Form 5498, Individual Retirement Arrangement (IRA)
Information, to indicate if the IRA is part of a SEP. This enables the Service
to match this information with an IRA owner’s W-2, to identify employers
maintaining SEPs.
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CWF 702
IRS Form 5305-SEP or
IRS Form 5305A-SEP
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FAQs regarding SEPs
What is a SEP?
A SEP is a simplified employee pension plan. A SEP plan provides employers with a
simplified method to make contributions toward their employees’ retirement and, if
self-employed, their own retirement. Contributions are made directly to an Individual
Retirement Account of Annuity (IRA) set up for each employee (a SEP-IRA).
Note: The IRS has a system of correction programs for sponsors of retirement plans,
including SEPs, which are intended to satisfy Internal Revenue Code requirements
but have not met the requirements for a period of time. This system, the Employee
Plan Compliance Resolution System (EPCRS), permits employers to correct plan
failures and thereby continue to provide their employees with retirement benefits on a
tax-favored basis.
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How is a SEP established ?
A SEP is established by adopting a SEP agreement and having eligible employees
establish SEP-IRAs. There are three basic steps in setting up a SEP, all of which
must be satisfied.
• A formal written agreement must be executed. This written agreement may be
satisfied by adopting an Internal Revenue Service (IRS) model SEP using Form