Retirement plan sponsors and vendors alike will all tell you that nothing in the world of retirement plans is truly simple. This was supported by the findings of the Employee Plans Compliance Unit’s recent SEP Plan Compliance Check project. The project revealed an abundance of errors by both SEP plan sponsors and financial institutions.
A SEP is designed to allow small employers to provide retirement benefits to its employees without getting bogged down in all of the rules associated with the more complex qualified plans like 401(k) plans and the like. SEPs are not subject to the Employee Retirement Income Securities Act of 1974 (ERISA), do not have a 5500 filing requirement with the DOL and their assets are invested in individual retirement accounts (IRAs). While these differences make them far less complex and expensive to administer, contributions to the participants’ account still receive favorable tax treatment. While SEPs are designed to be straightforward, employer funds that receive favorable tax treatment are likely to be governed by rules that are far from simple.
- SEPs must include all employees of the employer who have earned at least $550 in three out of the last five years, except union and non-resident alien employees. More liberal requirements are permitted.
- SEPs may impose an age requirement up to age 21.
- Since 1997, any newly established SEP can only allow employer contributions.
- Contributions are 100% vested immediately.
- Employer contributions are subject to a uniform allocation requirement that can include the use of a permitted disparity formula.
- Employees can withdraw funds without restriction and pay the associated income tax and early withdrawal penalty if not age 59 ½.
SEPs can be very useful and fairly easy to maintain with the proper understanding of the rules and requirements. But the Compliance Project results clearly show that many sponsors and, quite possibly, their advisors are not clear on exactly what is or what is not permitted.
If you would like additional information on SEPs or any other type of retirement plan, please contact Mark Flanagan of Aronson’s Employee Plan Benefit Services Group at 301.231.6257.
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