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A Q&A on Simplified Employee Pension (SEP) Plans

As a self-employed individual or small business owner, taking care of your and your employees’ retirement is easy with a Millbury Savings Bank Simplified Employee Pension (SEP). Here’s some information to get you started.

Q. What is a SEP plan? What is a SEP IRA?

A. Like a profit-sharing plan, a SEP plan is a tax-advantaged retirement savings plan that is built around a Traditional IRA and used primarily by smaller businesses. Once an employer establishes a SEP plan using the IRS’s Form 5305-SEP plan document, each eligible employee opens a SEP IRA (a Traditional, not Roth IRA) in his or her own name, into which the employer makes contributions on his or her behalf.

Q. What are the advantages of a SEP?

A. For the employer: Unlike more complex plans, SEPs are easy to establish and the employer’s IRS tax reporting requirements and related costs are minimal. Employers do not have to make contributions to the SEP every year. The amount of any contribution can vary from 0% to 25% of each eligible employee’s compensation up to the IRS’s annual SEP contribution limits (however, the percentage of compensation that is contributed to the SEP must be the same for the employer and all other eligible employees). Check with your tax advisor for information on SEP contribution limits and the deductibility of contributions, especially for self-employed individuals. SEP contributions may be made after the calendar year-end and may be deductible as a business expense. For a business comprising only one employee who is also the business owner, the establishment and on-going maintenance of a SEP is very simple and quite inexpensive.

For the employee: SEP IRAs can accept higher annual SEP contributions compared to an individual’s own contribution to an IRA. Employees can still establish and contribute to their own Traditional or Roth IRAs if otherwise eligible. (However SEP participation can impact the tax deductibility of an individual’s own Traditional IRA contributions.) SEP contributions made by the employer are excluded from the employees’ taxable income until withdrawn, interest earned on them is tax-deferred until withdrawn, and employers must make contributions on behalf of all eligible employees, even those who have attained age 70½. Employees are always 100% vested in their SEP contributions, as they will reside within their own SEP IRA.

Q. Which employers can establish a SEP?

A. A SEP can be used by virtually any employer including self-employed individuals and sole proprietorships, corporations, DBAs, LLCs, and “Sub-Chapter S” corporations.

Q. Which employees are eligible to participate?

A. Generally, all employees can be eligible to participate in the SEP. However, an employer can choose to exclude employees who are under age 21, employees who have not worked in (up to) three of the past five years, and those not earning the minimum annual amount of $600. Once an employee meets the company’s SEP eligibility requirements, he or she cannot be excluded from the plan for any year that contributions are made by the employer. Employees who are eligible to receive a SEP contribution must have it deposited into their SEP IRA directly by the employer.

Interested in opening a SEP IRA for yourself and your small business? Stop by our Millbury office and speak to Christine Lucier, our vice president and retail banking officer.

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