First State Bank & Trust Co.
SIMPLIFIED EMPLOYEE PENSION PLAN
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A simplified employee pension (SEP) plan is a business retirement plan that allows employers
to make contributions to an employee's individual retirement account (IRA), and provides the
employer with a tax deduction. The employer's contribution is not regarded as income to the
employee until the time of distribution.
At First State Bank & Trust Company, we can help you set up a SEP plan for your employees,
so you can help them start saving for retirement and receive tax benefits for your company!
Who can contribute to a SEP?
Only the employer can contribute to a SEP. The contribution can be made any time before your
tax-filing due date. Your employees may not make contributions to their SEP. But contributions
made by the employer are not regarded as income to the employee at the time of contribution.
What requirements do my employees have to meet to participate?
You must first have your employees open a SEP/IRA. Most
eligibility requirements are determined by the employer, with guidelines in place. For example,
you may set a minimum age requirement for your employees to participate, but this cannot be higher
than 21 and there is no maximum age. You may set a minimum service requirement, not to exceed three
of the immediately preceeding five years. You may also exclude certain non-resident aliens. For more
specific information on requirements to participate, see your tax or legal professional.
What tax benefit does my business receive from contributing to employees' SEP plans?
Contributions made to employees' SEP plans are tax deductible for your business. They are also not reported
as income to the employee and are not subject to federal income tax or FICA and FUTA taxes. The deadline
to make contributions is the employer's income tax-filing due date, plus extensions.
Another benefit of establishing a SEP plan for your employee is a tax credit for pension plan
startup cost available to eligible employers. Consult your tax professional to see if your
business qualifies for this tax credit.
What are the contribution limits on an SEP?
You may contribute from zero to 25% of each employee's annual compensation, up to a limit of $40,000 annually.
Employee compensation includes wages, tips, salaries, professional fees, and other pay for
services rendered. Due to the complexity of determining what is compensation, you should seek
professional tax or legal guidance before determining employee compensation for SEP plan purposes.
In addition, the contribution percentage must be the same for each eligible employee.
I'm self-employed. Can I contribute to an SEP for myself?
Yes. You may make contributions on behalf of yourself to an SEP. For contribution purposes, your
compensation is equal to the net profit from the business, less one-half of the self-employment
tax and the contribution amount. Because of the complexity of these calculations, you should
consult with your tax or legal professional.
Talk to your tax professional before starting a SEP plan.
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