Pension Plans

Simplified Employee Pension Plans

Simplified employee pension plans, commonly referred to as "SEP"s are retirements plans designed for self-employed individuals or small businesses. Their popularity is due to the fact that they offer an effective way to shelter retirement funds from taxes while at the same time requiring very little in the way of administrative paperwork or expense.

SEPs permit employers to make tax-deductible contributions to their employees’ Individual Retirement Accounts (IRA). The SAR-SEP (Salary Reduction SEP) allows employees to make contributions to their own accounts through salary deferrals (elective deferrals). In order to qualify for a SAR-SEP plan an employer must have had 25 or fewer employees in the previous year. In addition, at least 50 percent of the employees must participate in the plan each year.

There are limits to how much an employer and/or employee may contribute to a SEP or SAR-SEP. For the SEP the maximum contribution on an annual basis is fifteen percent of compensation with a maximum dollar limit of $30,000 per employee. The employer must contribute the same percentage of salary to each employee.

The SAR-SEP limits employee deferrals to $9,240 for 1994, which is indexed each year. If the company has both an SEP and a SAR-SEP the total maximum contribution is the lesser of $30,000 or fifteen percent of compensation, subject to other limitations.