©2015, College for Financial Planning, all rights reserved.

Session 8SIMPLEs and SEPs

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMRetirement Planning & Employee Benefits

Session DetailsModule 5Chapter(s)

4, 5

LOs 5-6 Describe the basic characteristics of SIMPLE IRA plans.

5-7 Describe the basic characteristics of a Simplified Employee Pension (SEP).

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SEP PlansSimplified Employee Pension (SEP)

PlansDefinition• Employer contributions only• 2015 contribution limit = lesser of 25% of

compensation (up to $265,000) or $53,000• Participant accounts are always 100% vested. • Must be established by due date (including

extensions) for filing employer’s return.• IRA distribution and penalty rules apply.

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SEP PlansEligibility Requirements for a SEP• Age 21 and over• Performed service during 3 of the

immediately 5 preceding years• Earned at least $550 during the current yearExample: JR Financial Group Inc., a calendar-year corporation, maintains a SEP. Matthew began working at the corporation on September 1, 2012. Matthew worked 250 hours in 2012 and 900 hours each year in 2013 and 2014. If Matthew is at least age 21 by the end of 2015 and earns $550 or more during that year (regardless of the number of hours worked), he must participate in the SEP in 2015, even if he quits work before December 31, 2015.

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SEP Plans: for Employers

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Advantages• The plan is easy to establish

and administer• The employer usually has no

responsibility for the investment results in employee IRAs

• Establishing and funding the plan can take place after the official end of the tax year (i.e., until the tax return due date, including extensions)

• The plan is flexible regarding contributions the employer decides to make, if any

• Contributions equal to those allowed by most defined contribution plans may be made

Disadvantages• The employee is automatically

vested (100% vested) in the contributions; this does not help the employer retain good employees

• A SEP participant cannot borrow from his or her SEP-IRA account

• Many of the employees who do not need to be covered under a qualified retirement plan must be covered under a SEP, which can increase the employer’s costs

• IRA assets are not as thoroughly protected from creditors as are assets in qualified plans

SEP vs. IRA & Defined Contribution Plan

Similarities and DifferencesProvisions Shared

With IRAs

• Employee owns IRA• Employee is 100%

vested• April 15

contribution deadline (but SEP includes extensions)

• Withdrawals after age 59½

• Distributions taxed at ordinary rates

Provisions Shared With Defined

Contribution Plans• 25% employer

deduction limit (same as profit sharing plan)

• Plan may allow SARSEP if established prior to 1997

• Coverage tests required

• Top-heavy rules apply

• Controlled group, etc. rules apply

• Integration with Social Security allowed

Unique Provisions

• Special eligibility requirements:(Age 21 and over + Performed service during 3 of the immediately 5 preceding years + Earned at least $550 during the current year)

• Fully discretionary contributions

• No forfeitures

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SIMPLE IRA PlansDefinitionSimple IRA plans have the following basic characteristics:• Employer establishes a separate IRA for each eligible

employee• Employees may choose to make salary reduction

contributions to their IRA• Employer must either make up to a 3% mandatory

match or a nonelective contribution equal to 2% of each eligible employee’s compensation

• All contributions (employer and employee) are 100% vested

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SIMPLE IRA PlansEmployers Eligible to Establish SIMPLE IRAs• All employees (except certain union and

nonresident employees) employed during the calendar year are counted for purposes of the 100-employee limit

• Employers with no more than 100 employees who earned $5,000 or more in compensation during any two preceding calendar years (two-year grace period exception)

• Employer cannot maintain any of the following retirement plans in which employees accrue benefits: qualified plan, SEP, 403(a) or (b) plan, or government plan (other than a Section 457 government plan)

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SIMPLE IRA PlansEmployees Eligible to Participate in a SIMPLE IRA• Each employee who received at least $5,000 in

compensation during any two preceding years AND who is reasonably expected to receive at least $5,000 in compensation during the current year must be eligible to participate in the SIMPLE IRA.

• Union employees whose retirement benefits were the subject of good-faith bargaining and certain nonresident aliens may be excluded.

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SIMPLE IRA PlansRequired Employer Contributions to a SIMPLE IRA Plan • Match deferrals dollar-for-dollar up to 3% of

compensation (or match at a lower rate not less than 1% for two of every 5 years), or

• Make a 2% nonelective contribution – even if an employee doesn’t make any salary reduction contributions

• Employer contributions are always 100% vested • Employer contributions must be made by the

date the employer’s tax return is due (including extensions)

• Employer contributions are tax deductible8-10

SIMPLE IRA PlansRules for Employee Contributions to a SIMPLE

IRA • Deferrals (salary reduction contributions) are

allowed up to $12,500 (2015)• Catch-up contributions are permitted for

employees age 50 and over up to $3,000 (2015)• Deferrals are always 100% vested • Deferrals are excluded from taxable income, but

are taxed as ordinary income when distributed (same as IRA rules)

• Deferrals must be forwarded to a participant’s SIMPLE IRA no later than the 30th day of the month following the month in which they were withheld from the employee’s paycheck

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SIMPLE IRA PlansSIMPLE IRA Enrollment Requirements• An employer must notify each employee of his or

her right to make salary reduction contributions under the plan and the contribution alternative elected by the employer

• An employee must be notified and given the opportunity to make or change a salary reduction choice under a SIMPLE IRA plan before the beginning of the election period

• The election period (60-day period) runs from November 2 to December 31 of the preceding calendar year

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SIMPLE IRA Plans

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Advantages• The employer’s contributions

are tax deductible• Employee deferrals reduce

their current taxable income• The plan is easy to set up

using Form 5305–SIMPLE• Benefits are totally portable

for the employee• Participants may pursue many

investment possibilities• An employer has limited or no

investment responsibility• Fewer compliance and

administrative requirements than traditional pension plans; for example, nondiscrimination tests do not have to be performed

Disadvantages• Maximum annual contributions

(employee and employer) are less than those in a qualified plan

• An employer who adopts a SIMPLE plan cannot also maintain a qualified plan

• Employees are immediately fully vested in employer contributions; therefore, forfeitures cannot be used to reduce (i.e., subsidize) employer contributions

• SIMPLE IRA participants have less protection from nonbankruptcy creditors in certain states

SEP vs. SIMPLESEP SIMPLE

Maximum Employee Contribution

$0 100% of compensation up to $12,500 ($15,500 for individuals age 50 and over)

Employer contributions

Discretionary ContributionsLesser of 25% of compensation or $52,000 (compensation cap applies)

Nondiscretionary matching or nonelective contributions

Employer eligibility

No limit on number of employees

Limited to businesses of 100 or fewer employees who earned at least $5,000 the preceding year

Employee eligibility

Age 21 and overPerformed service during 3 of the immediately 5 preceding years

Earned at least $550 during the current year

No age requirementReceived at least $5,000 during any two prior years

Reasonably expected to receive $5,000 during the current year

Testing and annual filing

Not required Not required 8-14

SEP vs. SIMPLESEP SIMPLE

Setting up Easy EasyVesting 100% immediately 100% immediately, both

employer and employee contributions

Individual accounts

Yes; IRA Yes; IRA

Investment choices and responsibility

Employee Employee

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SEP vs. SIMPLESEP SIMPLE

Deadline for establishing and funding

Tax due date, including extensions

• Cannot be established earlier than the first day following the 60-day election period. Generally, must be established by October 1. Salary reduction contributions must be contributed to a financial institution no later than the 30th day of the month following the month in which amounts would have been paid in cash.

• Employer matching or nonelective contributions must be made on or before the due date of the employer’s tax return, including extensions.

Tax advantages

Tax deductibility up to allowed limits (and deferral for SARSEP plans)

Tax deductibility up to allowed limits and deferral

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Question 1Which of the following could be disadvantages of a SEP from the employer’s point of view?I. mandatory annual contributionsII. statutory eligibility requirementsIII.$12,500 (indexed) deferral limit in 2015IV. lack of vesting schedules

a. III onlyb. I and III onlyc. II and IV onlyd. II, III, and IV only

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Question 2Which one of the following is not a basic provision of a SEP?a. individual ownership of accountsb. 25% limit on employer contributionsc. forfeiture reallocations based on

compensationd. plan must not discriminate in favor of

highly compensated employees

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©2015, College for Financial Planning, all rights reserved.

Session 8End of Slides

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMRetirement Planning & Employee Benefits