Employer-offered Simplified Employee Pension (SEP) Plans: How to stay in compliance
Many small business owners opt to establish Simplified Employee Pension (SEP) plans as retirement savings vehicles for themselves and their eligible employees. These plans are designed to be straightforward in implementation and compliance with regulatory standards. However, non-compliance can incur significant costs. Therefore, business owners setting up an SEP plan should adhere to the following best practices:
1. Obtain an SEP plan document from the investment provider or use an IRS-approved prototype. The document must be signed by a responsible officer of the company.
2. Provide annual SEP plan documents to all employees to ensure transparency and compliance.
3. Review any potential related-party businesses that could create a controlled group or affiliated services group situation.
4. Ensure all qualifying employees are included in the contribution computation and that contributions are funded promptly. Employees qualify for SEP plan contributions if they meet the following criteria:
– Are 21 years or older,
– Have performed services during at least three of the immediately preceding five years, and
– Have received compensation equal to or more than the SEP compensation limit for the year (currently $650 for 2021).
Should your SEP plan come under scrutiny from the IRS Plan unit, there are remedies to fix SEP plans that are out of compliance. Please contact your ShindelRock tax professional for more information about SEP plans and the regulatory guidelines that govern them.