SEP Retirement Plans For Small Businesses
What are SEP retirement plans for small businesses and how do they work? But in order for you to completely understand the whole situation about SEP retirement plans for small businesses, you must first be aware of several definitions - contribution, earned income, eligible employee. As defined by the IRS, A contribution is an a mount you pay into a plan for all those participating in the plan, including self-employed individuals. Limits apply to how much, under the contribution formula of the plan, can be contributed each year for a participant. Earned income is net earnings from a business in which your services materially helped to produce the income. To be an eligible employee, one must meet the following requirements - age 21 or older; has worked for the given employer for at least 3 years of the last 5; has received a minimum of $500 in compensation from the employer in the previous year. If you make contributions for yourself, you need to make a special computation to figure your maximum deduction for these contributions. Compensation is your net earnings from self-employment. This definition takes into account - the deduction for one half of your self-employment tax; the deduction for contributions on your behalf of the plan. If you are or have been a 5% owner of the business maintaining the plan, amounts you receive at any age that are more than the benefits provided for you under the plan formula are subject to an additional tax. This tax also applies to amounts received by your successor. The tax is 10% of the excess benefits includable in income. If an employee improperly uses his or her SEP-IRA, such as by borrowing money from it, the employee has engaged in a prohibited transaction. In that case, the SEP-IRA will no longer qualify as an IRA. As an employer, you cannot prohibit distributions from a SEP-IRA. Also, you cannot make your contributions on the condition that any part of them must be kept in the account. Distributions are subject to IRA rules. You can set up a SIMPLE Deadline for setting up a SIMPLE IRA plan only if you had 100 or fewer employees who received $5,000 or more in compensation from you for the preceding year. Under this rule, you must take into account all employees employed at any time during the calendar year regardless of whether they are eligible to participate. You can use Form 5304-SIMPLE or Form 305-SIMPLE to set up a SIMPLE IRA plan. |