SEP IRA FAQs

Q: What Is a Simplified Employee Pension Plan?
A: A Simplified Employee Pension (SEP) plan is a retirement plan established by an employer. Each year, the employer can contribute a certain percentage of each eligible employee's compensation directly to the employee's traditional IRA.

Q: Am I Eligible for a SEP Plan?
A: As a business owner, whether incorporated or not, you may establish a SEP. Sole proprietors and partnerships can have SEPs, even if there are no employees. However, if you currently maintain a qualified retirement plan, you cannot establish an Internal Revenue Service (IRS) model SEP plan for your business.

Q: What Is the Maximum SEP Contribution?
A: Under a SEP, you must contribute a uniform percentage of compensation for each eligible employee. You may contribute the lesser of $40,000 or 25 percent of each employee's compensation. *

For an employee, compensation is his/her total W-2 wages from the employer sponsoring the SEP. For a self-employed person, compensation is his/her earned income from self-employment. Special adjustments to compensation are necessary before a self-employed person can apply the desired contribution percentage.

*The maximum amount of compensation or earned income used in determining contributions for any employee is subject to the compensation limit of Internal Revenue Code (IRC) Section 401(a)(17). Currently at $200,000, this limit will increase as cost-of-living adjustments permit.

Q: Do I Get a Tax Deduction for My SEP Contributions?
A: Yes! Dollars you contribute on behalf of yourself and your employees, within the above limits, are generally deductible as a business expense. A self-employed individual claims his/her personal SEP contribution as an adjustment to gross income on his/her personal income tax return.

Q: May I Have a Traditional or Roth IRA in Addition to a SEP?
A: Yes. You and your employees may contribute to traditional and/ or Roth IRAs if eligible. If a SEP contribution is made, you are considered an active participant in an employer-maintained retirement plan. Therefore, the deductibility of your traditional IRA contribution will depend on your modified adjusted gross income and income tax-filing status.

Q: Must I Make a Contribution for Each of My Employees?
A: No, you are allowed to exclude certain classes of employees if you choose. You can exclude employees because of:

• Age-You may exclude employees who are younger than 21 years of age. But, once eligible, contributions must continue, even for employees over age 70 ½.
• Service-You may exclude employees who have not worked for you at least three of the immediately preceding five years.
• Minimum Compensation-You may exclude from a current year contribution employees who have earned less than $450 from you during the year (subject to annual cost-of-living adjustments).
• Other-You may also exclude nonresident aliens receiving no U.S.-source income from you, as well as employees covered under a collective bargaining agreement if retirement benefits were a subject of negotiation.

Q: Must I Contribute the Same Percentage Each Year?
A: No. You may vary your contribution percentage any time prior to the last day for making a contribution. If you wish, you may skip the contribution entirely for any year.

Q: Can I Establish a SEP for My Part-Time Self-Employment Even Though I Am Also a Full-Time Employee?
A: Yes. You may establish a SEP and contribute up to 25 percent of your earned income* from part-time self-employment or $40,000, whichever is less. Of course, if you have any eligible employees in your part-time business, they must also be covered.

*The maximum amount of compensation or earned income used in determining contributions for any employee is subject to the compensation limit of Internal Revenue Code (IRC) Section 401(a)(17). Currently at $200,000, this limit will increase as cost-of-living adjustments permit.

Q: What Happens to the Funds After I Make My Contributions?
A: All SEP contributions are made to traditional IRAs. Once the SEP contribution has been made, each employee's account will be subject to all of the traditional IRA rules. These include limits on withdrawals prior to age 59 ½ and required minimum distributions at age 70 ½.

Q: What Happens When I Withdraw Money From My SEP/IRA?
A: If you take a distribution from your IRA before you reach age 59 ½ , you will owe, in addition to regular income taxes, a 10 percent premature-distribution penalty tax on the taxable amount of the distribution. Exceptions to the penalty tax exist in the case of distributions for disability, death, purchase of a first home, qualified higher education expenses, medical expenses exceeding 7.5 percent of your adjusted gross income, paying for health insurance premiums if you are unemployed, satisfaction of an IRS levy, or an elected series of substantially equal periodic payments made over a life expectancy period from the IRS's Single Life Table or Joint and Last Survivor Table.

Q: When Must I Withdraw the Funds in My SEP/IRA?
A: When you reach age 70 ½ , you must take a required minimum distribution each year, or penalty taxes will apply.

Q: What Happens to My Account in the Event of My Death?
A: Your named beneficiary(ies) will receive the rights to your account. Distributions to the beneficiary(ies) will be made in accordance with required minimum distribution rules and your IRA agreement.

Q: Is it Difficult to Establish a SEP?
A: No. To establish a SEP, you must complete an IRS-approved form, provide a copy to each employee, and instruct each of them to open a traditional IRA.

Q: When Can I Open a SEP?
A: The deadline for opening or contributing to a SEP is your business's income tax-filing deadline, including extensions.

Q: How Do I Open a SEP?
A: See any of our retirement plan representatives and we will explain the nature of these accounts in more detail. You should consult your tax or legal professional prior to establishing a SEP for your business.

This brochure is effective for tax-year 2002 and thereafter. This brochure is intended to provide general information on federal tax laws governing Simplified Employee Pension plans. It is not intended to provide legal advice or to be a detailed explanation of the rules or how such rules may apply to your individual circumstances. For specific information, you are encouraged to consult your tax or legal professional. IRS Publication 560, Retirement Plans for Small Business, IRS Publication 590, Individual Retirement Arrangements, and the IRS's web site, www.irs.gov. may also provide helpful information.