Establishing a SEP or SIMPLE IRA Plan

SEP or SIMPLE IRA plans allow an employer to contribute directly to individual retirement arrangements (IRAs) for all eligible employees (including the employer). An employer can establish a SEP or a SIMPLE IRA plan by adopting an IRS model Form or a prototype plan. As an alternative to these pre-approved plans, an employer can use an individually designed plan.


Adopting a SEP Plan

An employer may establish a SEP plan in one of three ways.

First, an employer can complete Form 5305-SEP, Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement. However, the Form 5305-SEP can't be used by an employer who:
1. has any other qualified plans (other than another SEP plan);
2. wants a plan year other than the calendar plan year;
3. has leased employees;
4. is a member of a controlled group, affiliated service group or trade or business under common control (unless all eligible employees participate in the SEP plan); or
5. wants an allocation formula other than a same-percentage-of-compensation formula.

Second, the employer can purchase and adopt a prototype SEP plan. Mutual fund companies, insurance companies, banks, credit unions and certain other businesses offer prototype SEP plans. Prototype plans have been reviewed by the IRS. An employer that adopts a prototype plan can rely on the opinion letter issued to the prototype plan sponsor as evidence that the prototype plan's terms meet the tax-qualification requirements of the Internal Revenue Code (Code).

Third, the employer can adopt an individually designed plan that is usually drafted for the employer by a benefits practitioner. Unlike a model Form plan or a prototype plan, an individually designed plan cannot be relied upon to meet the requirements of the Code unless the plan receives a favorable determination letter from IRS.


Adopting a SIMPLE IRA Plan

When establishing a SIMPLE IRA plan, an employer may:
- choose one of the IRS model SIMPLE IRA Plans by completing:
     . Form 5304-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) - Not for Use With a Designated Financial Institution, or
     . Form 5305-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) - for Use With a Designated Financial Institution.
- purchase and adopt a SIMPLE IRA prototype plan and rely on the opinion letter issued to the prototype plan sponsor as evidence that the prototype plan's terms meet the Code's tax-qualification requirements; or
- adopt an individually designed SIMPLE IRA plan and apply for a determination letter from the IRS in order to ensure that the plan's terms meet the Code's tax-qualification requirements.