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How are
contributions made?
The employer forwards contributions directly to participant IRAs (even if
the participant is age 70 1/2 or older). The annual contribution is
discretionary and may be changed or discontinued in any given year. The
same contribution percentage must be made on behalf of each eligible
employee. Salary deferral contributions from employees are not permitted
to a SEP IRA. All contributions are 100% vested immediately-the employer
cannot attach any length of service requirements to the participant's
"ownership" of the contribution.
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What is the
maximum that can be contributed?
Twenty five percent of a participant's compensation up to the annual
compensation cap is the maximum that can be contributed. For 2003, the
maximum dollar amount is $40,000, based on the compensation cap of
$200,000. An individual may also make a regular IRA contribution of up to
$3,000 ($3,500 with "Catch-Up" Contribution) for 2003, to the same
account, although the contribution may not be deductible due to active
participation in the SEP IRA and the participant's compensation level.
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How can an
employee age 50 or older participate in "Catch-Up" contributions to a SEP?
For taxable years 2002 through 2005 these individuals can increase their
annual regular IRA contribution by $500 and in 2006 and thereafter by
$1,000. The employee must turn 50 by the end of the taxable year for which
the catch-up contribution is made. Catch-up contributions are subject to
deductibility rules.
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What amount is
tax-deductible to the employer?
The employer may deduct all contributions up to 25% of the compensation
paid to each individual covered under the plan.
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Who can establish
a SEP IRA?
Corporations (S & C type), sole proprietors, partnerships and non-profit
organizations can establish a SEP IRA, provided all eligible employees
participate in the plan.
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What are the
eligibility requirements?
Employers must include those employees who have attained age 21 and who
have been employed in any three of the preceding five calendar years,
including part-time employees who earned annual compensation in excess of
$450 in 2003 (indexed). Less restrictive eligibility requirements can
always be established.
Employers may categorically exclude employees covered under a good-faith
collective bargaining agreement and non-resident aliens.
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What is the
deadline for establishing a SEP IRA?
To fund a plan for 2002, the plan must be established and funded by the
employer's tax-filing deadline, including filed-for extensions. The
establishment process requires the employer's completion of the SEP
Adoption Agreement and the completion of an IRA Adoption Agreement by each
participant.
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Can an employee
take a distribution from the SEP IRA?
An employee can withdraw all or part of a SEP IRA at any time; unlike a
qualified Profit Sharing or Money Purchase Pension Plan, there is no
requirement that the employee experience a "qualifying event" such as
termination of employment or retirement to have access to their SEP
account assets. Loans are not permitted from a SEP IRA.
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Are there any
taxes or penalties on distributions?
All distributions will be taxable as income to the recipient, except for
non-deductible Traditional IRA contributions. Generally distributions
prior to age 59 1/2 are subject to a 10% early withdrawal penalty in
addition to income taxes. Please consult your tax advisor for more
complete information and additional penalties that might affect you or
your employees.
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Summary
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- Helping To Keep Your Life In Balance