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What is a Simplified Employee Pension Plan?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 13 November 2018
  • Copyright Protected:
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    Conjecture Corporation
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Also known as an SEP, a simplified employee pension plan is a form of retirement plan that involves contributions made by employers directly into accounts set up for each employee. Employees are also allowed to make contributions to these plans throughout the calendar year. As with the Individual Retirement Account in the United States and the Individual Savings Account in the United Kingdom, the amount of the cumulative annual contribution is not subject to taxes until the funds are withdrawn.

Plans of this type are often an excellent solution for small business owners. Assuming that the business and the employee both meet all the eligibility requirements that apply in the country where the employee resides, it is possible to withhold any contributions that the employee wishes to make, then electronically transfer those funds directly into the simplified employee pension plan. The small business owner can then make periodic contributions based on whatever factors apply, such as a percentage of income earned by the employee each month or quarter, or some other criteria that is defined in the terms of the employment contract.

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For people who are self-employed, a simplified employee pension plan is worth considering. Since plans of this type tend to be easier to set up and manage than other forms of pension plans, there is no need to invest much time on the actual administration of the plan. Depending on the country where the self-employed individual works and lives, the percentage of his or her gross income that can be contributed annually may be relatively high. As long as the level of contribution remains within the limits allowed by national regulations, all contributions are tax-deductible.

While the simplified employee pension plan was once universally available in one form or another, some countries began imposing limits on the opening of new plans during the latter part of the 1990’s. While plans that were already in place were not affected, new SEPs were not allowed to be created. In recent years, some countries have reconsidered this approach, especially owing to the increase in home businesses and freelance professionals since the beginning of the 21st century. For this reason, it is a good idea to check with the revenue agencies that govern federal and state tax collection, and confirm that it is possible to set up a simplified employee pension plan within that jurisdiction. Make it a point to find out the particulars of how the plan must be structured, and the percentage of income that can be contributed to the plan each year while still receiving the tax benefit.

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