Simplified Employee Pension Plans (SEPs)

SEP

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Simplified Employee Pension (SEPs)

SEPs are available to any business of any size. These differ significantly from other defined-contribution plans discussed above in that they only allow contributions from the employer. Though employees do not have the ability to contribute to their SEP plan, they do have control over which options the funds are invested in. Contributions in 2012 are limited to the lesser amount of either 25 percent of the employee’s salary or $50,000. Participants who wish to withdraw funds from their SEP plan before retirement may be subject to a 10 percent tax penalty. Companies who choose to use this plan often do so because there are very low administrative costs, they are easy to set up and operate, and they offer flexibility with annual contributions if cash flow is an issue for the company. The contribution flexibility allows companies who often fluctuate between good years and bad years to change the contribution amounts to their employees annually, according to their cash flow.

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