There are a number of options to choose from when trying to decide what type of retirement plan you should set up for your company. If you are a self-employed individual, sole proprietor, or member of a small partnership or corporation, a Simplified Employee Pension Plan may be the best option.
First, you will need to figure out if a Simplified Employee Pension Plan or SEP IRA is right for you. SEP IRAs are an especially good option for self-employed individuals or sole proprietors, because they require minimum paperwork for reporting. If you have a business with multiple employees, a SEP IRA may not be a good choice, because only the employer makes contributions. There are no employee elective deferrals. The employer has the ability to change the company contribution at any time, for any reason. Contributions are tax deductible and immediately 100% vested.
The contribution limit for 2009 is 25% of your annual income or $49,000, whichever is less. If you decide to choose a Simplified Employee Pension Plan and have multiple employees, you must contribute the same percentage for each employee regardless of his/her income. Contributions must be paid directly to an IRA trustee, custodian or annuity company. They cannot be paid to the individual.
Once you have decided that a Simplified Employee Pension Plan is best for your business, you must then complete IRS Form 5305-SEP. This form is used to establish the eligibility requirement for participation in your plan. You will use this form to set an age limit for employees. You can also place a limitation based on time of service. You can choose to include or not include employees covered under collective bargaining agreements, non-resident aliens and employees who earn less than $450. The original of Form 5305-SEP must be kept on file at your office in case of an IRS audit of your plan.
After completion of Form 5305-SEP, you must then decide what company you would like to be the custodian of your SEP IRA. This is typically a mutual fund company or an annuity company. Once you have made your decision, you will then need to complete the paperwork required by that company. For Simplified Employee Pension Plans, companies do not typically require plan level paperwork. You should have only to complete paperwork on a participant level.