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operating a sepWho is eligible to participate?
Generally, any employee who performs services for your business must be included in a SEP. However, there are some exceptions to this general rule. Among the employees that may be excluded from a SEP are those who:
- Have not worked for the company during three out of the last five years.
- Have not reached age 21 during the year for which contributions are made.
- Are employees who are covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you.
- Are nonresident alien employees who have received no U.S. source wages, salaries, or other personal services compensation from you.
- Received less than $550 in compensation in 2009 and 2010 (subject to cost-of-living adjustments
in later years) during the year. What are the contribution requirements?
By establishing a SEP, you, the employer, have adopted a plan that requires an IRA to hold the contributions made on behalf of each of your eligible employees. A SEP is funded by employer contributions. Check your SEP plan document for the amounts you have agreed to contribute.
Total contributions to each employee's IRA cannot exceed the lesser of $49,000 for 2009 and 2010 (subject to cost-of-living adjustments
for later years) or 25% of pay. Each employee is always 100% vested in (or, has ownership of) all contributions to his or her SEP-IRA.
After you send the SEP contributions to the financial institution, the financial institution will manage the funds. Depending on the financial institution, SEP contributions can be invested in individual stocks, mutual funds, and other, similar types of investments.
Each participating employee must receive an annual statement stating the amount contributed to the account for the year.What are the basic distribution/withdrawal rules?
SEP contributions and earnings can be withdrawn at any time. A withdrawal is taxable in the year received. If an employee makes a withdrawal before he or she is age 59½, generally a 10% additional tax applies. SEP contributions and earnings may be rolled over tax free to other IRAs and retirement plans.
SEP contributions and earnings must eventually be distributed. A specific minimum amount is required to be distributed by April 1 of the year following the year you reach age 70½. (For further details regarding the required minimum distribution amount, see IRS Publication 590
.)How Does a SEP work?
Jed works for the Quincy Chintz Company. Quincy decides to establish a SEP for its employees. Quincy has chosen a SEP because the chintz industry is cyclical in nature, with good times and down times. In good years, Quincy can make larger contributions for its employees and in down times it can reduce the amount. Quincy knows that under a SEP, the contribution rate (whether large or small) must be uniform for all employees. The financial institution that Quincy has picked to work with for its SEP has several investment funds for the Quincy employees to choose from. Jed decides to divide the contribution to his SEP-IRA among three of the available funds. Because only employer contributions are permitted, Jed cannot also make contributions under the SEP.What do I do if I make a mistake in operating my plan?
Generally, if the SEP fails to satisfy the requirements for SEPs, tax benefits can be lost. However, any error can likely be corrected by using one of the correction programs described in the Retirement Plans Correction Programs brochure