Business owners frequently put off planning for their retirement. If you have employees, you may want to offer retirement as a benefit, but feel you are unable because of its expense. However, there is one option you may want to consider that would ensure income for you and your employees in your later years: a SEP Plan.

What is a SEP Plan?

SEP stands for Simplified Employee Pension. A SEP is a retirement savings plan that small companies often offer to their employees. It is also ideally suited for the self employed. SEPs combine many of the advantages of more complicated qualified plans but are as simple to understand as IRAs.

As a self employed person, why should I invest in a SEP over an IRA?

A SEP allows you more of a deduction than an IRA. An IRA deduction is limited to $2,000 per year. With a SEP, you can contribute up to 15% of your income, not to exceed $24,000. If your income is $35,000 for a certain year and you contribute $5,000 to a SEP, your federal income tax will be calculated on only $30,000. Assuming a 28% tax bracket, that saves you $1,400 in taxes. You can then invest that money directly into your retirement account.

How do SEPs appeal to small business owners?

SEPs can be administered with minimal administrative support, since there are no complicated reporting requirements. Each employee sets up his or her own IRA to receive SEP contributions, and each employee is responsible for choosing his or her own investments. In addition, employers can determine when and what amount to contribute to employee accounts. Since the contributions are tax deductible, you pay less in federal taxes.

What is the appeal for employees?

These days, it is hard for anyone to save money. SEPs make it possible for employees of small firms to receive employer contributions to their retirement funds and also benefit from tax deferred growth like employees of companies with other tax deferred pension plans.

As an employer offering SEPs, must I always contribute?

SEPs offer employer flexibility. You decide when and if to contribute. For instance, if you are having a tough year, you may want to make a smaller contribution than the year before, or not contribute at all. By the same token, if you are having a stellar year, you can reward employees for their accomplishments with a larger contribution.

Do I have to contribute the same amount to all employees?

No. You do not have to offer the exact same dollar amount to each employee. However, you are required to contribute the same percentage of compensation for all eligible employees. Employer contributions may not exceed the lesser of 15% of an individual employee's compensation or $24,000.

What are the employee eligibility guidelines?

Eligible employees include non union employees who are at least 21 years old, have worked for you at least 3 of the last 5 years, and have earned at least $400 during the past year.

When can you set up a SEP Plan?

As the employer, you have until the due date for your business tax return (plus extensions) to set up a SEP. To establish a SEP, you must sign an adoption agreement. Once the plan is set up, all eligible employees (including yourself) can establish IRAs to receive the SEP contributions.

Who can I call if I want to consider developing a SEP plan for my business?

Your accountant and investment advisor can help you determine if a SEP is the best choice for your business. They will look at your business profitability, your employee base, and how a SEP compares to other pension plan options. The important thing is to start as early as possible. In the first few years of your business, cash flow may not be on your side, but time is. Take advantage of it! Commit to paying yourself first. Develop a plan that will enable you to live the lifestyle you want when you retire. There is no time like the present to plan for the future!

 (Patricia L. Bennett is a registered representative of Tower Square Securities, Inc.
(NASD/SIPC). She is President of Bennett and Trussell Financial Services in Greenland, NH, 3/99)