In a small business with tight budgets, expenses and bills, no matter how big or small can be a problem. If you want to have a retirement plan for you and the employees under you, but are having second thoughts because of some plan’s high minimum, required regular contributions then a SEP IRA may just be the plan for you. SEP IRA rules and terms are very flexible and employees can do a 401k rollover into the account from a previous employer, which is beneficial for them. The conditions on making contributions to the plan are:
Employers Only
In this plan, contributions are exclusively made by employers. Employees can not contribute to their SEP plan. These contributions cannot be deducted from employee salaries. While this can be a negative on the employer’s part, this is offset by the fact that any contribution given to the SEP plan is 100% tax deductible.
Employer Choices
In making a contribution, the percentage that the employer contributes must be uniform for all employees involved. For example, if an employer contributes 15% of an employee’s income to the plan, all other employees under the SEP must receive the same percentage of contribution.
A big advantage of this plan is that contributions, including when to contribute and how much, are dependent on the employer’s discretion. Employers are not required to make contributions every year, nor are they required to contribute a fixed percentage. This gives employers more freedom on how to spend their limited budgets without worrying about the retirement plan.
If profits are high, the employer can take advantage of the plan’s generous contribution limits: the lesser of $49,000 or 25% of the employee’s salary (20% if self-employed).
So when it comes to contribution limits, this plan is the best of both worlds. Employer discretion on contributions can be advantageous if business is not doing well. On the other hand, high contribution limits can be maximized if the business returns are high.