Sensible solution for sole-proprietorship & family owned businesses
A Simplified Employee Pension (SEP) IRA– is an affordable, IRA-based retirement savings program designed to emulate pensions. SEP IRA contributions can only be made by the employer and have higher limits than a SIMPLE IRA, making them a good option family- or employee-owned businesses.
Should your business start a SEP?
SEP’s are typically offered by family-owned businesses because they are generally less expensive than profit sharing or 401(k) plans, and have higher contribution limits relative to IRAs and SIMPLE plans. SEP is most often used as a low-cost alternative to profit sharing plans.
Since SEPs do not allow employees to contribute, and require employer contributions generally at the same percentage for each employee, they are most commonly used in businesses where all employees have ownership of some kind. SEPs are also used where the business wants to offer a strong retirement benefit to employees, but does not want to contend with the complexity of processing contributions by the employees.
Plan Features
Employee Eligibility
An individual who meets all the following requirements is eligible to participate:
- Has reached age 21
- Has worked for the employer in at least 3 of the last 5 years
- Received at least $600 in compensation from the employer during the year (for 2018 and 2019)
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An employer can use less restrictive participation requirements than those listed, but not more restrictive ones. The following employees can excluded from a SEP:
- Employees covered by a union agreement or a collective bargaining agreement.
- Nonresident alien employees who do not have U.S. wages, salaries or other personal services compensation from the employer.
Employer Contributions
SEPs are funded by employer contributions only. The contributions an employer makes to each employee’s SEP IRA cannot exceed the lesser of:
- 25% of compensation, or
- $56,000 for 2019
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These limits apply to contributions you make for your employees to all defined contribution plans, which includes SEPs. Compensation up to $280,000 in 2019 of an employee’s compensation may be considered. If you are self-employed, you make a special computation (described in IRS Publication 590) to determine the maximum deduction for yourself.
Employers are not required to contribute every year. In years you do choose to contribute, the contributions are typically a uniform percentage of compensation and must be made to all eligible employees.
Investment Options
You and your employees will have access to investment options selected and monitored by Morningstar Investment Management LLC* to provide sufficient choice without overburdening participants, and is designed to provide access to assets across a broad spectrum of capitalization and investment strategy.
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Morningstar Investment Management LLC is a registered investment adviser and subsidiary of Morningstar, Inc. Morningstar Investment Management uses its affiliate, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission, as a sub-adviser in providing an investment lineup to The Plan Sponsor. The investment lineup provided to The Plan Sponsor by Morningstar Investment Management is derived from the universe of investments made available by Millennium Trust Company for use in its service. The universe does not include all investments available in the marketplace. Both the universe of investments defined by Millennium Trust Company and the list of investments selected by Morningstar Investment Management LLC are subject to change without notice. Particular investments in the investment lineup may not be appropriate investments for individual employees, and there may be other investment options that are more suitable. Morningstar Investment Management may have more favorable opinions of certain investments which are not included in the universe made available by Millennium Trust Company. Morningstar Investment Management’s selections were based on qualitative factors and quantitative analysis in addition to the judgment of analysts. Morningstar Investment Management is not acting in the capacity of adviser to investors. The Morningstar name and logo are registered marks of Morningstar, Inc.
SEP IRA Pricing
Fees to the Employer
Set-up fee $250
Contribution Reversal Fee $15
Fees to the Employees
Annual Account Fee $40
Annual Servicing Fee 50 basis points*
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*Financial comparisons use basis points to track very small percentages. One basis point is simply 1/100 of one percent.