SEP IRA Plans

SEP IRAs are the Simplified Employee Pension Individual Retirement Accounts that are adopted by the business owners to provide retirement benefits to themselves and their employees. A SEP IRA is actually a variation of the individual retirement account that is used in the US.

As per the rules, all the employees of a single employer must receive exactly the same benefits under the SEP plans. Therefore, a SEP plan taken by the employer is applicable to every single eligible employee. SEP account is just similar to an Individual Retirement Account and therefore the funds present in it can be invested just like they are done in IRA.

But, there is a limit to how much an employer can contribute to an employee's SEP account. As per the rules, an employer can contribute a maximum of 25% of the employee's income. For example, if an employee has the salary o $10,000 then the employer can contribute a maximum of $2500 towards his SEP IRA account.

Simple IRA
The term 'Simple' stands for Saving Incentive Match Plan for Employees. It is an employer provided plan that offers less costly and simpler administration rules. That is the reason why many employers prefer Simple over normal SEP plans. As per the rules, an employer with less a maximum of 100 employees can only take up simple IRA.

Usually, SEP IRA is taken up by the business owners who have no employees. They usually establish a SEP IRA to avail tax benefits for themselves. On the other hand, a business owner who has employees can also take up SEP IRA and benefit from it. Since the contributions made to these accounts are completely tax deductible and treated like expense.

Let's have a look at the eligibility criteria that an employee must fulfill to be able to take up SEP benefits. The employee must be at least 21 years old. Secondly, he must have at least served for 3 years in the last 5 years. Lastly, he must have earned at least $ 450 in compensation, from the employer, for the year. If an employee fulfills all these three requirements, he can be made to fill up the SEP IRA form. As from the point of view of the employer, all incorporated and unincorporated businesses, sole proprietorships, partnerships, and LLCs qualify to establish SEP IRA.

Also, part time employees who have earned more than $450 in the whole year and who fulfill the other two requirements can be included in SEP IRA. It is a very healthy concept, both, for the employee as well as the employer and that is the reason why more and more people are adopting in all sizes of businesses.