With open enrollment season upon us and the end of the tax year coming for most businesses, now is a good time to explore your company’s current or future retirement plan options. For sole proprietors and smaller businesses, a Simplified Employee Pension (SEP) is often among the most attractive options.
BIG LIMITS
While small business owners have other options, few offer the generous limits of the SEP. In 2019, you can contribute up to the lesser of 25% of employees’ annual compensation or $56,000, indexed to inflation. If you are a sole proprietor, your compensation is determined by your net earnings from self-employment. Consult your tax professional.
QUALIFICATIONS
In this nonelective plan, employees must receive an employer SEP contribution if they are at least age 21, have worked for the company at least three of the past five years and will be paid at least $600 this year. Plans are allowed to have less restrictive requirements to include younger or newer employees.
FLEXIBILITY
Employers do not have to make a contribution to the plan every year, as is required by some other qualified retirement plans. Additionally, startup and administrative costs are very reasonable.