SEP (Simplified Employee Pension) IRA is established by employers, including self employed individuals like sole proprietors or partnership firms. If you are running a company with say 20 employees, then you can open a SEP IRA for each of your employees. All contributions to the SEP IRA plan are tax deductible. This means if you are contributing say an annual total amount of $50,000 to IRA. You can deduct the same from your annual taxable income and save taxes. Employees too don’t have to pay taxes on contributions. However, if an employee withdraws money from the plan, then he or she will have to pay the tax applicable at that time. If the applicable tax at time of withdrawal is lower then the tax rate during the time of contribution, then your whole investment idea could be considered profitable. Establishing a Simplified Employee Pension Individual Retirement Account is not a difficult task. The US government and its agencies like the IRS have simplified things substantially for you. Moreover you can easily hire finance professional or any finance company to assist you in setting up the plan. There are various flavours of SEP IRA plan. IRS model, 5305 SEP IRA, etc. are some of the popular types of SEP IRA. Irrespective of which type of IRA you opt for your company employees, you will need some basic information. You will need to decide criteria on which an employee can join the plan. Then you will have to arrive at a formula to calculate your contribution. Plus, you will be required to include your basic company details.
The financial institution that you contact for establishing the plan has a critical role to play in the entire plan life cycle. Once the plan is established, they act as a Trustee for the whole plan. They manage the funds received by the plan. They then invest the funds in to suitable instruments thereby ensuring growth of the funds. They also do various administrative functions like providing yearly statements to the members of the plan. As per government guidelines, the employees should receive the statement by end of January each year. Statement shows how much contribution has the employer made in the previous year. Usually reputed mutual funds, banks and insurance companies act as Trustees for any SEP IRA plan. The model that you use for establishing the plan is also a very critical step in the whole process. Most employers opt for the IRS model. The plan acts like a contract or policy document which specifies all terms and conditions for all participants. If you have a need to change anything in the plan, you are free to do so anytime during the life of plan. However, you will have to inform all the participants at least 30 days prior to putting the change in effect. Generally, employee communication is critical to avoid any legal action from government or any of its agencies.
Once established, a SEP IRA plan is simple to operate and maintain as majority of the tasks are carried out by the financial institution. Also your employees will be happy with a good plan. A well established SEP IRA can make notable difference in your employee satisfaction levels and ultimately will help your company bottom line.