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HOW TO SETUP A SEP PLAN

Setting up a Simplified Employee Pension (SEP) plan is as easy as 1-2-3.


Choosing a Financial Institution

You'll need to choose a financial institution to serve as trustee of the Individual Retirement Accounts (IRAs) that will hold each employee/participant's retirement plan assets. These accounts will receive the contributions you make to the plan. As you search for the right financial institution for you and your employees, you need to have an idea of what sort of investment options your plan's IRAs should include and what level of service you require of that financial institution.

- If you want employees to be able to invest in common stocks and mutual funds, make sure that's an option in the financial institution you choose.

- You may find that a plan offering several different investment options, including mutual funds and money market funds, will appeal to you and your employees.

- A plan with very few investment options and excessive fees may discourage employees from fully participating in the plan.

- Educate yourself about the basics of investing funds for retirement. Encourage your employees to do the same. Having at least a basic understanding of the investment choices you will be making over the course of your working lifetime is a very important component of maximizing the resources you accumulate for your retirement. For more information, order a Savings Fitness publication from www.dol.gov/ebsa.

- Ask about fees. Excessive fees can mean lower earnings on your investments and a smaller retirement nest egg.


Resources for Choosing a Financial Institution

Finding the right financial institution to house the plan's IRAs is an important step. You may already have several business relationships established that are a good place to start looking such as:

- Accountant or attorney;
- Bank, savings & loan, or federal credit union;
- Insurance company; or
- Brokerage firm.

Start with people you know and trust already.


Resources for Choosing a Retirement Plan Professional

Professional groups in your area can refer you to their members who have expertise in retirement plan and investment issues.

- Local American Bar Association chapter
- Local American Institute of Certified Public Accountants chapter
- Local associations of Certified Financial Planners
- Organizations you belong to, such as a local business group or social organization may have contacts for you, too.

Any of these groups can provide you with a list of persons with expertise in the retirement plan area. The internet search engines can be another resource for finding information on retirement plan design and operation.


Important Timing Note

Get started early in the year, so you don't have to rush the process of setting up your plan in order to have a deduction in your current tax year. Although the financial institution holding the IRA accounts can be changed, a good start with the right company can help give your employees confidence in their new retirement plan.

A SEP must be established by the due date of your tax return.


Set-Up Steps for a SEP

There are three steps to establishing a SEP.

1. Execute a written agreement to provide benefits to all eligible employees.
2. Give employees certain information about the agreement.
3. Set up an IRA account for each employee.


Written Agreement

The written agreement must include the name of the employer, the requirements for employee participation, the signature of a responsible official and a definite allocation formula.

The IRS has a model SEP plan document, IRS Form 5305-SEP, Simplified Employee Pension - Individual Retirement Accounts Contribution Agreement. This form is not filed with the IRS.

There are some restrictions when using the IRS model plan (Form 5305-SEP). This form may not be used by an employer who:

- Maintains any other qualified plan (except another SEP),
(A plan is "maintained" even if no contributions were made during the year.),
- Uses the services of leased employees,
- Wants a plan year other than the calendar year, or
- Wants an allocation formula that takes into account Social Security contributions you made for your employees.

If you can't use the Form 5305-SEP you may use a prototype document. These are usually provided by a mutual fund, insurance company, bank or other qualified institution. You may also have a SEP individually designed for your business.


Provide Information to Participants

Within a reasonable time after a SEP has been adopted and, later, after a new employee becomes employed, the employer must furnish the following information to each eligible employee:

- Notice that the SEP has been adopted.
- Requirements an employee must meet to receive an allocation.
- The basis on which the employer's contribution will be allocated.

Each year the employer must furnish an annual statement to each employee participating in the SEP showing the amount contributed to the employee's SEP-IRA for that year. Generally the annual statement for a calendar year SEP must be furnished no later than the following January 31.


Notification

If you use Form 5305-SEP, you must give your employees a copy of the form and its instructions. The model SEP is not considered adopted until each employee is provided with the following information:

- A statement that IRAs other than the one the employer contributes to may provide different rates of return and contain different terms.
- A statement that the administrator of the SEP will provide a copy of any amendments within 30 days of the effective date along with a written explanation of its effects.
- The administrator will give written notification to the participant of any employer contributions made to a participant's IRA by January 31 of the following year.

If you use a prototype or individually-designed plan you must give all eligible employees similar information.


Set Up a SEP-IRA for Each Employee

A SEP-IRA must be set up by or for each eligible employee. They may be set up with banks, insurance companies, or other qualified financial institutions.

All SEP contributions must go to traditional IRAs set up for the eligible employees.

A SEP-IRA cannot be a Roth IRA or a SIMPLE IRA. Contributions to a SEP-IRA will not affect the amount an individual can contribute to a Roth IRA because the contributions to the SEP are made by the employer rather than the individual.

Financial institutions authorized to hold and invest SEP contributions include banks, savings and loan associations, insurance companies, certain regulated investment companies, federally-insured credit unions and brokerage firms. Investment decisions about SEP-IRA accounts are made by the employee.

You and your employees will receive a statement from the financial institutions investing your SEP contributions both at the time you make the first SEP contributions and at least once a year after that. Each institution must provide a plain-language explanation of any fees and commissions it imposes on SEP assets withdrawn before the expiration of a specified period of time.


Timing of Setting Up a SEP Plan

A SEP plan may be established as late as the due date (including extensions) of your business income tax return for the year you want to establish the plan.


Who Must Participate in a SEP?

All eligible employees must be allowed to participate. An eligible employee is an employee who:

1. Is at least 21 years of age and
2. Performed services for you in at least 3 of the last 5 years.

You may be less restrictive with these rules, but not more restrictive. You may not include a "specific number of hours worked" requirement with this type of plan.

The term "employee" includes a self-employed individual who has earned income. In other words, an owner-employee is both an employer and an employee. The term employee also includes certain leased employees.

Service is any work performed for you for any period of time, however short. If you are a member of a controlled group of corporations, trades or businesses under common control, or an affiliated service group, service includes any work performed for any period of time for any other member of such group, trades or businesses.

Certain employees can be excluded from a SEP:

- Employees who are covered by a union agreement, if retirement benefits were the subject of good-faith bargaining.
- Nonresident aliens who have no U.S. source income from you.
- An employee who did not earn $550 in 2009 and 2010 (subject to cost-of-living adjustments) in compensation from you during the year.
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