- THE MAGAZINE
Providing retirement benefits has not always been easy for the small employer, especially cleaning professionals. Filing required documents with the Internal Revenue Service (IRS) and Department of Labor to establish a retirement plan can be complicated, cumbersome, and as a result, time consuming. Ongoing plan administration and record keeping can prove overwhelming without designated benefits or accounting departments. What's more, seeking outside help to handle these functions can be expensive.
Add to that fiduciary responsibilities, intricate vesting schedules and often stringent contribution requirements, and it becomes clear why qualified retirement plans have historically been a big headache for the cleaning professional.
Congress created the Simplified Employee Pension (SEP) plan in 1978 with small business owners in mind. As its name suggests, the hallmark of a SEP is simplicity. And as an increasing number of smaller employers and self-employed individuals can attest, it's an easy and inexpensive solution to their retirement plan needs.
Easy to Establish and Maintain
A SEP is an Individual Retirement Account (IRA) you establish for yourself and, if applicable, each of your eligible employees. Each employee maintains his or her own "SEP-IRA" account, so there are no employer filing requirements with the IRS or Department of Labor. Individual participants assume fiduciary responsibilities for their own account. Essentially, there is only minimal paperwork and bookkeeping to establish and maintain a SEP, and there is little, if any, need for consultants, lawyers, accountants, or actuaries.
In 2000, with a SEP, the employer could make tax-deductible contributions of up to 15 percent of compensation or $25,000, whichever is less, for himself and each eligible employee. Because these contributions are considered "discretionary," employers can choose to change the level of contributions from year to year, or even skip making contributions altogether.
There are two general rules when it comes to employer discretionary contributions, however: 1) You must contribute the same percentage of compensation to each eligible employee's SEP-IRA as you do to your own account; and 2) You must make a contribution on behalf of all eligible employees. Employers can choose to establish certain eligibility requirements, but in general, employees who are at least 21 and have worked for the company three of the past five years must be covered.
Like An IRA
The SEP helps the small business owner and professional plan for tomorrow's retirement needs while enjoying valuable tax deductions today. Another important benefit for small businesses with employees is goodwill -- employees like SEPs. From the employees' perspective, the SEP-IRA account acts very much like a normal IRA. In fact, employees may make their own yearly IRA contributions directly into the SEP-IRA. All money contributed to the account -- employer and employee -- grows without being taxed for as long as it remains in the plan and is always fully vested.
Money comes out of the SEP plan like an IRA, too -- beginning at age 59 and a-half, you and your employees may begin making penalty-free withdrawals. And you can, if you wish, wait until age 70 and a-half to start taking minimum distributions from the plan.
Investment Flexibility is Key
Investment flexibility is also key. Any investment allowed in an IRA is permissible in a SEP, including bonds, stocks, mutual funds, unit trusts, etc.
Who Can Establish a SEP Plan?
A SEP could prove beneficial whether you're a small to medium-sized company, corporation, or Subchapter S corporation, partnership, sole proprietor, professional association or individual with outside income such as consulting or director's fees. The SEP-IRA can be used as a first retirement plan because it's so easy and inexpensive to establish and maintain, or as a second plan to allow for additional contributions at the employer's discretion. Because of its simplicity and flexibility, it's especially well suited for new businesses or companies with a volatile profit history.
A Salary Reduction Option
Certain smaller employers -- those with 25 or fewer eligible employees -- can also choose to take advantage of a salary reduction option for SEPs. CODA-SEPs (Cash or Deferred Arrangement SEPs) traditionally were an ideal way for small businesses to shift part of the rising cost of retirement benefits to employees, while helping them meet their retirement saving needs. However, since Jan. 1, 1997, COD-SEPs were replaced with a new retirement vehicle, the SIMPLE -- Savings Incentive Match Plan for Employees.
The SIMPLE can either be in IRA form, where contributions would be made to IRA's established on behalf of participating employees, or adopted as part of a 401(k). SIMPLEs would not be subject to nondiscrimination requirements, and those established in IRA form would be subject to simplified reporting requirements.
If you're looking to spend more time running your business than administering your retirement plan, the SEP is worth considering as a simple, low-cost alternative to a profit sharing plan. No IRS approval is needed, no 5500 forms need to be filed with the IRS and there's no ERISA reporting. The plan can also be set up, and contributions made, by tax filing deadline plus extensions, not necessarily by year-end. To find out more about the Simplified Employee Pension plan and how it could meet your small business' retirement needs, contact your financial advisor.