Have you considered offering employees a Simplified Employee Pension (SEP) plan? These plans allow an employer to contribute to traditional Individual Retirement Accounts (IRAs), which are set up for employees, and they're available to employers of any size. You can even establish a SEP plan if you're self-employed.
How SEPs work
A SEP plan can provide you with a simple way to contribute toward employees’ retirement along with their own retirement savings. As an employee of the company, you can also establish an account for yourself. Partners in limited liability companies can have SEP IRAs.
You can make direct contributions to an IRA, which can be set up for each plan participant via a SEP-IRA. This is just like a traditional IRA, and follows the same investment, distribution, and rollover rules.
The IRS provides an example of a scenario in which a SEP can be used1:
"Jed works for the Rambling RV Company. Rambling RV decides to establish a SEP for its employees. Rambling RV has chosen a SEP because the RV industry is cyclical in nature, with good times and down times. In good years, Rambling RV can make larger contributions for its employees and in down times it can reduce the amount. Rambling RV’s contribution rate (whether large or small) must be uniform for all employees. The financial institution that Rambling RV has chosen for its SEP has several investment funds from which to choose. Jed decides to divide the contribution to his SEP-IRA among three of the available funds. Jed, an employee, cannot contribute because SEPs only permit employer contributions."
A SEP can give employees a significant income when they retire, as employers set aside money in retirement accounts for themselves and their employees. These plans do not have the same start-up and operating costs that conventional retirement plans do, and they enable contributions of up to 25% of each employee's pay.
A SEP can be established easily by using IRS Form 5305-SEP2, which serves as a SEP prototype, or by using an individually designed plan document. Note that when this form is used, you may not use any other type of retirement plan, unless it's another SEP. There are no filing requirements for the employer, and only the employer contributes to traditional IRAs (SEP-IRAs) set up for each eligible employee, while the employee is always completely vested in or has ownership of all SEP-IRA money.
Who is eligible for a SEP?
As noted, businesses of any size are eligible for a SEP, but which employees are eligible? This depends on the plan requirements you enable. For example, your plan may require that they are at least 21 years of age and have worked for your business for at least three of the last five years. This ensures inclusion of loyal employees and those you have elected to keep around. Your plan may require employees to have received at least $600 in compensation from your business for the year. You can use a less restrictive plan, such as letting employees in if they are 18 rather than 21, and if they have been employed for three months. The key is that with a SEP, eligibility provisions must apply equally to all owners and employees.
If your business is co-owned by you and your spouse, each of you must meet the plan requirements for eligibility to participate. You can establish your plan to make sure you're immediately eligible and amend it later to have more restrictive eligibility requirements. Just remember that you must also meet the new requirements to continue participating.
SEPs can be a great benefit for your employees and can also help you recruit and retain talent. By their very nature, they are fair to all employees and the employer, and have clear rules that are relatively easy to follow. If you are not currently offering a retirement plan, you may find a SEP to be an ideal option.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A.