Establishing a Simplified Employee Pension Plan Step-by-Step

A Simplified Employee Pension Plan (SEP) may be a great idea for a small business or self-employed person due to the lower cost of administering the plan. The simplified process cuts down on the plan cost, putting more savings into your account. If you are considering establishing an SEP, there are just a few simple steps to follow.

Step 1: Find a Plan Administrator

Contact a plan administrator or representative. This should be a person from a financial institution experienced with SEP plans. The administrator you choose will be in charge of investing your funds and explaining the program to your employees. There are financial management firms with specialties in your industry or your size of company. Consider working with a firm recommended by a colleague or associate. Your initial contribution can be made any time up to 6 months after your tax filing for that year.

Step 2: Complete the Form

The administrator will typically offer the Form 5305-SEP, or a similar document. You will need to supply the name of the employer, requirements for participation in the plan, a signature and the formula you will use for an employee contribution. If you are a novice with this, your administrator can help, but the plan is designed to be simple. This form is a legal contract you are establishing with your employees, sorting out how their benefits will be administered.

Step 3: Give Form to Employees

You have to inform your employees about their benefits. The easiest way to do this is to give them written notice through the same form you used to establish the pension plan. You will need to tell them three basic pieces of information:

  • An SEP-IRA is different from other IRAs; it may generate unique return rates as a result.
  • The administrator will notify the employees if there are changes to the plan (30 days).
  • Employees who elect to participate will receive a report of their contributions by January 31 of the following year (for tax purposes).

You may also want to provide your employees with the contact information for the administrator.

Step 4: Operate the Plan

Your trustee will largely be in charge of operating the plan, but you should be aware of a few key responsibilities you maintain.

  • You must forward contributions when employees provide them. You are obligated to do this as soon as possible and no later than the 15th business day of the month following the contribution. 
  • You need to assure you are not exceeding contribution limits to your employee's accounts.
  • You must provide uniform contribution for each employee. You do not need to contribute annually, but when you do contribute you have to provide the same percentage match for every single employee in your organization.
  • You need to keep your trustee updated on new employees and changes in your organization in order to ensure you are following legal guidelines.
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