AVAILABLE TO
Small business owners and self-employed individuals who want a plan that is relatively easy to set up and administer. IRS prototype may be used by employers who currently do not maintain any other qualified retirement plan (other than another SEP).
HOW IT WORKS
Employer makes contributions to employees' IRAs. Employer determines annual deductible contribution that applies to all eligible employees. Amount can vary each year from 0% to 25% of compensation. Generally, all eligible employees must be covered by the arrangement.
MAIN FEATURES
To be eligible, employees cannot be required to meet more than the following three requirements: (1) be at least 21 years old, (2) have at least 3 years of service in last 5 years, and (3) have earned at least $450 in compensation from the employer for the year. 100% immediate vesting. Annual notification to participants of amount contributed by employer. Early distribution penalty of 10% if contributions and any earnings are withdrawn before age 59½ (with certain exceptions); required minimum distributions generally begin at age 70½. Employer contributions can be made until employer's tax filing deadline (including extensions).
ANNUAL CONTRIBUTIONS
Employers may make contributions of up to 25 percent of each eligible employee's annual compensation (for self-employed individuals, compensation means earned income.) The maximum amount of contributions an employer can make to a participant's SEP IRA is 100% of compensation or $40,000 ($41,000 in 2004), whichever is less. This maximum includes both employee and employer contributions from all the qualified retirement plans in which an employee participated in during the year for the same employer.
ADVANTAGES
The above review is meant to serve as a general overview only; other requirements apply. You should always review any materials provided by your employer to learn more specific information about plan(s) in which you are eligible to participate. You should consult a tax advisor for applicability to specific facts and circumstances.