Operating a SEP or SIMPLE IRA Plan

May Header

Two retirement plans available to small busineses are the Simplified Employee Ppnsion (SEP) plan and the "SIMPLE" Individual Retirement Account (IRA) plan. Following are brief overviews of these plans and the types of errors frequently seen by tho. IRS.

SEPs - General Rules

With SEPs, IRAs are set up for each eligible employee and contributions me made only by the employer. * The employer has complete discretion in deternining whether or not to make annual contributions. Qualifying contlibutiions are tax deductilble by the employer and not taxed to the employee until withdrawn from the plan.

Contribution limits are subject to annual inflation adjustment. For 2016, the maximum contribution for each employee is the lesser of 25% of annual compensation (up to $265000) or $53000 .** There is a spec:ial computation for figuring thp maximum contrihution to a self employed individual's own SEP account.

Common SEP Pitfalls

According to tho. IRS, common errors in SEP plans include:

CautionDiscrimination in employer contributions. Contributions may not discriminate in favor of "highly compensated employees" (generally, a 5% owner or a person with compensation exceeding $120,000**). Contributions must also bear a uniform relationship to the first $265,000 in compensation.**

Improper exclusion of employees.

Eligible employees include all those who have (l) reached age 21, (2) performed services for the employer during at least three of the immediately preceding five ypars, and (::3) received at. lpast $600 in compensation. **

Permitting elective salary deferrals by employees. No salary deferrals are allowed under a SEP plan.*

Delays in taking required minimum distributions (RMDs). Employees must begin taking their RMDs at age 70V2, whether or not they are still working.

SIMPLE IRAs - General Rules

While SEPs are available to employers of any size, SIMPLE IRAs are available only to employers with 100 or fewer employees who received at least. $5,000 ill comppnsation from the employer for the preceding year. As with a SEP, a SIMPLE IRA plan requires tho. employer to establish IRAs for each eligible employee. Unlike a SEP, SIMPLE IRAs may allow eligible employees to defer compensation into the plan. For 2016, deferrals may 1I0t exceed $12,500, or $15,500 [or those 50 or older.

Additionally, employers 'must make an annual contribution by electing to either (l) match employee salary contributions up to 3% of pay*** or (2) contribute 2% of pay for each employee who's eligible to contribute, even if the employee chooses not to do so.

Common SIMPLE IRA Pitfalls.

According to the IRS, frequently seen errors in SIMPLE IRA plans include:

Matching errors. Though the employer match may be reduced to as low as 1 %, the match may fall below 3% in no more Lhan Lwo ouL of Lhe previous five years.

Late deposits of employee contributions. The U.S. Department of Labor requires that deposits be made at the earliest date they can reasonably be segregated. Alternatively, a seven-day safe harbor rule may be available.

Required 60-day notices. Generally, pligiblp pmploypes must rpceivp noticp during the 60-day period prior to the beginning of tho. plan year of the employer's decision to make a fixed or matching contribution and of the employees' right to make or modify a salary deferral electioll.

Pitfalls Common to Both Plans

According Lo Lhe IRS, frequently seen errors in both plans include improper application of the plan's definition of "compensation" and failure to timely amend the plans. The IRS recommends that employers check their plans yearly .

* A limited exception applies to a salary recluction simplified employee pension (SARSEP) in effect On Decemher 31, 1996.

** Subject to future inflation adjustments. *** The employer may elect a lower matching percentage in certain years.


10 Employers: Deferred due date for Form 941, if timely deposits were made.

16 Exempt Organizations: File 2015 Form 990, 990-EZ, or 990-N, if the organization reports on a calendar-year basis.

16 Partnerships and S Corporations: If an election to use a tax year other than a required tax year was made, file Form 8752 to report the required payment.


15 Individuals: Second installment of 2016 estimated tax due.

15 Corporations: Deposit second installment of estimated income tax for 2016, if the organization reports on a calendaryear basis.


1 Employee Benefit Plan Sponsors: File 2015 Form 5500 Annual Return/ Report of Employee Benefit Plan. If your plan is not a calendar-year plan, file the form by the end of the seventh month after the plan year ends.

1 Employers: FiIe Form 941 , Employer's Quarterly Federal Tax Return; quarterly deposit due.

2016 May Pg 03