If you’ve been weighing the options of setting up a pension plan for your employees, options abound. However, especially if you are a small business, the difficulty may rest in choosing which plan is the best for you. The administration and rules of the different plans can be daunting.

One option that may be right for you is the simplified employee pension plan, commonly known as a SEP.

A Flexible Plan With Minimal Paperwork

SEPs are flexible pension plans that allow the employer to decide whether or not to make contributions in a particular year, and have only a few requirements governing their administration. Simply filling out the IRS Form 5305 SEP will get you started.

Tax Advantages of the SEP

After filling out the proper forms, you will be ready to make contributions. Part of the tax advantages of the SEP include:

  • You get a current income tax deduction for any contribution you make for your employees.
  • As long as you meet the current year’s deadline, you can contribute to the SEP in 2016 prior to filing your tax return, and get a deduction on your company’s net income for 2015.
  • Your employees will not be taxed by your contributions to their plan until the money is distributed – often at retirement.

SEP IRAs Must Be Qualified

Deductible contributions must be made to each employee’s IRA, which must be a SEP-IRA. The IRS must approve SEP-IRAs. Certain rules govern how much of your contribution is deductible—it must be the lesser of 25 percent of compensation of your employee, or $53,000 (for 2015).

Your employees have complete control of the money within their individual SEP—IRAs investments and the earnings within are tax-free.

The SEP’s Simplicity Makes it Popular

Unlike other types of pension plans, the SEP’s administrative burden is very light. Still, there are some other requirements—for instance, all employees must choose to participate in the program, and your contributions cannot favor your highest performing or best-compensated employees. You will not need to file annual contributions with the IRS, but some minimal record keeping must be done by a trustee of the SEP, which can be a mutual fund or bank.

Want to Go Further?

We can help you decide if a SEP is a good choice for a pension plan for your business, and what the implications are for this year’s tax return. Our tax experts can help advise you on the best course of action. Contact us; with our years of technical experience, advanced training, and cutting edge technology, we are your financial partner.