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1040 Es1040 es 2. 1040 es Simplified Employee Pensions (SEPs) Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Setting Up a SEPWhen not to use Form 5305-SEP. 1040 es How Much Can I Contribute?Contribution Limits Deducting ContributionsDeduction Limit for Contributions for Participants Deduction Limit for Self-Employed Individuals Carryover of Excess SEP Contributions When To Deduct Contributions Where To Deduct Contributions Salary Reduction Simplified Employee Pensions (SARSEPs)SARSEP ADP test. 1040 es Deferral percentage. 1040 es Employee compensation. 1040 es Compensation of self-employed individuals. 1040 es Choice not to treat deferrals as compensation. 1040 es Limit on Elective Deferrals Tax Treatment of Deferrals Distributions (Withdrawals) Additional TaxesEffects on employee. 1040 es Reporting and Disclosure Requirements Topics - This chapter discusses: Setting up a SEP How much can I contribute Deducting contributions Salary reduction simplified employee pensions (SARSEPs) Distributions (withdrawals) Additional taxes Reporting and disclosure requirements Useful Items - You may want to see: Publication 590 Individual Retirement Arrangements (IRAs) 3998 Choosing A Retirement Solution for Your Small Business 4285 SEP Checklist 4286 SARSEP Checklist 4333 SEP Retirement Plans for Small Businesses 4336 SARSEP for Small Businesses 4407 SARSEP—Key Issues and Assistance Forms (and Instructions) W-2 Wage and Tax Statement 1040 U. 1040 es S. 1040 es Individual Income Tax Return 5305-SEP Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 5305A-SEP Salary Reduction Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs A SEP is a written plan that allows you to make contributions toward your own retirement and your employees' retirement without getting involved in a more complex qualified plan. 1040 es Under a SEP, you make contributions to a traditional individual retirement arrangement (called a SEP-IRA) set up by or for each eligible employee. 1040 es A SEP-IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP-IRA is maintained. 1040 es SEP-IRAs are set up for, at a minimum, each eligible employee (defined below). 1040 es A SEP-IRA may have to be set up for a leased employee (defined in chapter 1), but does not need to be set up for excludable employees (defined later). 1040 es Eligible employee. 1040 es An eligible employee is an individual who meets all the following requirements. 1040 es Has reached age 21. 1040 es Has worked for you in at least 3 of the last 5 years. 1040 es Has received at least $550 in compensation from you in 2013. 1040 es This amount remains the same in 2014. 1040 es You can use less restrictive participation requirements than those listed, but not more restrictive ones. 1040 es Excludable employees. 1040 es The following employees can be excluded from coverage under a SEP. 1040 es Employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you. 1040 es Nonresident alien employees who have received no U. 1040 es S. 1040 es source wages, salaries, or other personal services compensation from you. 1040 es For more information about nonresident aliens, see Publication 519, U. 1040 es S. 1040 es Tax Guide for Aliens. 1040 es Setting Up a SEP There are three basic steps in setting up a SEP. 1040 es You must execute a formal written agreement to provide benefits to all eligible employees. 1040 es You must give each eligible employee certain information about the SEP. 1040 es A SEP-IRA must be set up by or for each eligible employee. 1040 es Many financial institutions will help you set up a SEP. 1040 es Formal written agreement. 1040 es You must execute a formal written agreement to provide benefits to all eligible employees under a SEP. 1040 es You can satisfy the written agreement requirement by adopting an IRS model SEP using Form 5305-SEP. 1040 es However, see When not to use Form 5305-SEP, below. 1040 es If you adopt an IRS model SEP using Form 5305-SEP, no prior IRS approval or determination letter is required. 1040 es Keep the original form. 1040 es Do not file it with the IRS. 1040 es Also, using Form 5305-SEP will usually relieve you from filing annual retirement plan information returns with the IRS and the Department of Labor. 1040 es See the Form 5305-SEP instructions for details. 1040 es If you choose not to use Form 5305-SEP, you should seek professional advice in adopting a SEP. 1040 es When not to use Form 5305-SEP. 1040 es You cannot use Form 5305-SEP if any of the following apply. 1040 es You currently maintain any other qualified retirement plan other than another SEP. 1040 es You have any eligible employees for whom IRAs have not been set up. 1040 es You use the services of leased employees, who are not your common-law employees (as described in chapter 1). 1040 es You are a member of any of the following unless all eligible employees of all the members of these groups, trades, or businesses participate under the SEP. 1040 es An affiliated service group described in section 414(m). 1040 es A controlled group of corporations described in section 414(b). 1040 es Trades or businesses under common control described in section 414(c). 1040 es You do not pay the cost of the SEP contributions. 1040 es Information you must give to employees. 1040 es You must give each eligible employee a copy of Form 5305-SEP, its instructions, and the other information listed in the Form 5305-SEP instructions. 1040 es An IRS model SEP is not considered adopted until you give each employee this information. 1040 es Setting up the employee's SEP-IRA. 1040 es A SEP-IRA must be set up by or for each eligible employee. 1040 es SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. 1040 es You send SEP contributions to the financial institution where the SEP-IRA is maintained. 1040 es Deadline for setting up a SEP. 1040 es You can set up a SEP for any year as late as the due date (including extensions) of your income tax return for that year. 1040 es Credit for startup costs. 1040 es You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP that first became effective in 2013. 1040 es For more information, see Credit for startup costs under Reminders, earlier. 1040 es How Much Can I Contribute? The SEP rules permit you to contribute a limited amount of money each year to each employee's SEP-IRA. 1040 es If you are self-employed, you can contribute to your own SEP-IRA. 1040 es Contributions must be in the form of money (cash, check, or money order). 1040 es You cannot contribute property. 1040 es However, participants may be able to transfer or roll over certain property from one retirement plan to another. 1040 es See Publication 590 for more information about rollovers. 1040 es You do not have to make contributions every year. 1040 es But if you make contributions, they must be based on a written allocation formula and must not discriminate in favor of highly compensated employees (defined in chapter 1). 1040 es When you contribute, you must contribute to the SEP-IRAs of all participants who actually performed personal services during the year for which the contributions are made, including employees who die or terminate employment before the contributions are made. 1040 es Contributions are deductible within limits, as discussed later, and generally are not taxable to the plan participants. 1040 es A SEP-IRA cannot be a Roth IRA. 1040 es Employer contributions to a SEP-IRA will not affect the amount an individual can contribute to a Roth or traditional IRA. 1040 es Unlike regular contributions to a traditional IRA, contributions under a SEP can be made to participants over age 70½. 1040 es If you are self-employed, you can also make contributions under the SEP for yourself even if you are over 70½. 1040 es Participants age 70½ or over must take required minimum distributions. 1040 es Time limit for making contributions. 1040 es To deduct contributions for a year, you must make the contributions by the due date (including extensions) of your tax return for the year. 1040 es Contribution Limits Contributions you make for 2013 to a common-law employee's SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000. 1040 es Compensation generally does not include your contributions to the SEP. 1040 es The SEP plan document will specify how the employer contribution is determined and how it will be allocated to participants. 1040 es Example. 1040 es Your employee, Mary Plant, earned $21,000 for 2013. 1040 es The maximum contribution you can make to her SEP-IRA is $5,250 (25% x $21,000). 1040 es Contributions for yourself. 1040 es The annual limits on your contributions to a common-law employee's SEP-IRA also apply to contributions you make to your own SEP-IRA. 1040 es However, special rules apply when figuring your maximum deductible contribution. 1040 es See Deduction Limit for Self-Employed Individuals , later. 1040 es Annual compensation limit. 1040 es You cannot consider the part of an employee's compensation over $255,000 when figuring your contribution limit for that employee. 1040 es However, $51,000 is the maximum contribution for an eligible employee. 1040 es These limits are $260,000 and $52,000, respectively, in 2014. 1040 es Example. 1040 es Your employee, Susan Green, earned $210,000 for 2013. 1040 es Because of the maximum contribution limit for 2013, you can only contribute $51,000 to her SEP-IRA. 1040 es More than one plan. 1040 es If you contribute to a defined contribution plan (defined in chapter 4), annual additions to an account are limited to the lesser of $51,000 or 100% of the participant's compensation. 1040 es When you figure this limit, you must add your contributions to all defined contribution plans maintained by you. 1040 es Because a SEP is considered a defined contribution plan for this limit, your contributions to a SEP must be added to your contributions to other defined contribution plans you maintain. 1040 es Tax treatment of excess contributions. 1040 es Excess contributions are your contributions to an employee's SEP-IRA (or to your own SEP-IRA) for 2013 that exceed the lesser of the following amounts. 1040 es 25% of the employee's compensation (or, for you, 20% of your net earnings from self-employment). 1040 es $51,000. 1040 es Excess contributions are included in the employee's income for the year and are treated as contributions by the employee to his or her SEP-IRA. 1040 es For more information on employee tax treatment of excess contributions, see chapter 1 in Publication 590. 1040 es Reporting on Form W-2. 1040 es Do not include SEP contributions on your employee's Form W-2 unless contributions were made under a salary reduction arrangement (discussed later). 1040 es Deducting Contributions Generally, you can deduct the contributions you make each year to each employee's SEP-IRA. 1040 es If you are self-employed, you can deduct the contributions you make each year to your own SEP-IRA. 1040 es Deduction Limit for Contributions for Participants The most you can deduct for your contributions to you or your employee's SEP-IRA is the lesser of the following amounts. 1040 es Your contributions (including any excess contributions carryover). 1040 es 25% of the compensation (limited to $255,000 per participant) paid to the participants during 2013 from the business that has the plan, not to exceed $51,000 per participant. 1040 es In 2014, the amounts in (2) above are $260,000 and $52,000, respectively. 1040 es Deduction Limit for Self-Employed Individuals If you contribute to your own SEP-IRA, you must make a special computation to figure your maximum deduction for these contributions. 1040 es When figuring the deduction for contributions made to your own SEP-IRA, compensation is your net earnings from self-employment (defined in chapter 1), which takes into account both the following deductions. 1040 es The deduction for the deductible part of your self-employment tax. 1040 es The deduction for contributions to your own SEP-IRA. 1040 es The deduction for contributions to your own SEP-IRA and your net earnings depend on each other. 1040 es For this reason, you determine the deduction for contributions to your own SEP-IRA indirectly by reducing the contribution rate called for in your plan. 1040 es To do this, use the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed, whichever is appropriate for your plan's contribution rate, in chapter 5. 1040 es Then figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5. 1040 es Carryover of Excess SEP Contributions If you made SEP contributions that are more than the deduction limit (nondeductible contributions), you can carry over and deduct the difference in later years. 1040 es However, the carryover, when combined with the contribution for the later year, is subject to the deduction limit for that year. 1040 es If you also contributed to a defined benefit plan or defined contribution plan, see Carryover of Excess Contributions under Employer Deduction in chapter 4 for the carryover limit. 1040 es Excise tax. 1040 es If you made nondeductible (excess) contributions to a SEP, you may be subject to a 10% excise tax. 1040 es For information about the excise tax, see Excise Tax for Nondeductible (Excess) Contributions under Employer Deduction in chapter 4. 1040 es When To Deduct Contributions When you can deduct contributions made for a year depends on the tax year on which the SEP is maintained. 1040 es If the SEP is maintained on a calendar year basis, you deduct the yearly contributions on your tax return for the year within which the calendar year ends. 1040 es If you file your tax return and maintain the SEP using a fiscal year or short tax year, you deduct contributions made for a year on your tax return for that year. 1040 es Example. 1040 es You are a fiscal year taxpayer whose tax year ends June 30. 1040 es You maintain a SEP on a calendar year basis. 1040 es You deduct SEP contributions made for calendar year 2013 on your tax return for your tax year ending June 30, 2014. 1040 es Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. 1040 es For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040), Profit or Loss From Farming; partnerships deduct them on Form 1065, U. 1040 es S. 1040 es Return of Partnership Income; and corporations deduct them on Form 1120, U. 1040 es S. 1040 es Corporation Income Tax Return, or Form 1120S, U. 1040 es S. 1040 es Income Tax Return for an S Corporation. 1040 es Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. 1040 es (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. 1040 es , you receive from the partnership. 1040 es ) Remember that sole proprietors and partners can't deduct as a business expense contributions made to a SEP for themselves, only those made for their common-law employees. 1040 es Salary Reduction Simplified Employee Pensions (SARSEPs) A SARSEP is a SEP set up before 1997 that includes a salary reduction arrangement. 1040 es (See the Caution, next. 1040 es ) Under a SARSEP, your employees can choose to have you contribute part of their pay to their SEP-IRAs rather than receive it in cash. 1040 es This contribution is called an “elective deferral” because employees choose (elect) to set aside the money, and they defer the tax on the money until it is distributed to them. 1040 es You are not allowed to set up a SARSEP after 1996. 1040 es However, participants (including employees hired after 1996) in a SARSEP set up before 1997 can continue to have you contribute part of their pay to the plan. 1040 es If you are interested in setting up a retirement plan that includes a salary reduction arrangement, see chapter 3. 1040 es Who can have a SARSEP? A SARSEP set up before 1997 is available to you and your eligible employees only if all the following requirements are met. 1040 es At least 50% of your employees eligible to participate choose to make elective deferrals. 1040 es You have 25 or fewer employees who were eligible to participate in the SEP at any time during the preceding year. 1040 es The elective deferrals of your highly compensated employees meet the SARSEP ADP test. 1040 es SARSEP ADP test. 1040 es Under the SARSEP ADP test, the amount deferred each year by each eligible highly compensated employee as a percentage of pay (the deferral percentage) cannot be more than 125% of the average deferral percentage (ADP) of all non-highly compensated employees eligible to participate. 1040 es A highly compensated employee is defined in chapter 1. 1040 es Deferral percentage. 1040 es The deferral percentage for an employee for a year is figured as follows. 1040 es The elective employer contributions (excluding certain catch-up contributions) paid to the SEP for the employee for the year The employee's compensation (limited to $255,000 in 2013) The instructions for Form 5305A-SEP have a worksheet you can use to determine whether the elective deferrals of your highly compensated employees meet the SARSEP ADP test. 1040 es Employee compensation. 1040 es For figuring the deferral percentage, compensation is generally the amount you pay to the employee for the year. 1040 es Compensation includes the elective deferral and other amounts deferred in certain employee benefit plans. 1040 es See Compensation in chapter 1. 1040 es Elective deferrals under the SARSEP are included in figuring your employees' deferral percentage even though they are not included in the income of your employees for income tax purposes. 1040 es Compensation of self-employed individuals. 1040 es If you are self-employed, compensation is your net earnings from self-employment as defined in chapter 1. 1040 es Compensation does not include tax-free items (or deductions related to them) other than foreign earned income and housing cost amounts. 1040 es Choice not to treat deferrals as compensation. 1040 es You can choose not to treat elective deferrals (and other amounts deferred in certain employee benefit plans) for a year as compensation under your SARSEP. 1040 es Limit on Elective Deferrals The most a participant can choose to defer for calendar year 2013 is the lesser of the following amounts. 1040 es 25% of the participant's compensation (limited to $255,000 of the participant's compensation). 1040 es $17,500. 1040 es The $17,500 limit applies to the total elective deferrals the employee makes for the year to a SEP and any of the following. 1040 es Cash or deferred arrangement (section 401(k) plan). 1040 es Salary reduction arrangement under a tax-sheltered annuity plan (section 403(b) plan). 1040 es SIMPLE IRA plan. 1040 es In 2014, the $255,000 limit increases to $260,000 and the $17,500 limit remains at $17,500. 1040 es Catch-up contributions. 1040 es A SARSEP can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. 1040 es The catch-up contribution limit for 2013 is $5,500 and remains at $5,500 for 2014. 1040 es Elective deferrals are not treated as catch-up contributions for 2013 until they exceed the elective deferral limit (the lesser of 25% of compensation or $17,500), the SARSEP ADP test limit discussed earlier, or the plan limit (if any). 1040 es However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. 1040 es The catch-up contribution limit. 1040 es The excess of the participant's compensation over the elective deferrals that are not catch-up contributions. 1040 es Catch-up contributions are not subject to the elective deferral limit (the lesser of 25% of compensation or $17,500 in 2013 and in 2014). 1040 es Overall limit on SEP contributions. 1040 es If you also make nonelective contributions to a SEP-IRA, the total of the nonelective and elective contributions to that SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000 for 2013 ($52,000 for 2014). 1040 es The same rule applies to contributions you make to your own SEP-IRA. 1040 es See Contribution Limits , earlier. 1040 es Figuring the elective deferral. 1040 es For figuring the 25% limit on elective deferrals, compensation does not include SEP contributions, including elective deferrals or other amounts deferred in certain employee benefit plans. 1040 es Tax Treatment of Deferrals Elective deferrals that are not more than the limits discussed earlier under Limit on Elective Deferrals are excluded from your employees' wages subject to federal income tax in the year of deferral. 1040 es However, these deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax. 1040 es Excess deferrals. 1040 es For 2013, excess deferrals are the elective deferrals for the year that are more than the $17,500 limit discussed earlier. 1040 es For a participant who is eligible to make catch-up contributions, excess deferrals are the elective deferrals that are more than $23,000. 1040 es The treatment of excess deferrals made under a SARSEP is similar to the treatment of excess deferrals made under a qualified plan. 1040 es See Treatment of Excess Deferrals under Elective Deferrals (401(k) Plans) in chapter 4. 1040 es Excess SEP contributions. 1040 es Excess SEP contributions are elective deferrals of highly compensated employees that are more than the amount permitted under the SARSEP ADP test. 1040 es You must notify your highly compensated employees within 2½ months after the end of the plan year of their excess SEP contributions. 1040 es If you do not notify them within this time period, you must pay a 10% tax on the excess. 1040 es For an explanation of the notification requirements, see Rev. 1040 es Proc. 1040 es 91-44, 1991-2 C. 1040 es B. 1040 es 733. 1040 es If you adopted a SARSEP using Form 5305A-SEP, the notification requirements are explained in the instructions for that form. 1040 es Reporting on Form W-2. 1040 es Do not include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. 1040 es You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. 1040 es You must also include them in box 12. 1040 es Mark the “Retirement plan” checkbox in box 13. 1040 es For more information, see the Form W-2 instructions. 1040 es Distributions (Withdrawals) As an employer, you cannot prohibit distributions from a SEP-IRA. 1040 es Also, you cannot make your contributions on the condition that any part of them must be kept in the account after you have made your contributions to the employee's accounts. 1040 es Distributions are subject to IRA rules. 1040 es Generally, you or your employee must begin to receive distributions from a SEP-IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 70½. 1040 es For more information about IRA rules, including the tax treatment of distributions, rollovers, required distributions, and income tax withholding, see Publication 590. 1040 es Additional Taxes The tax advantages of using SEP-IRAs for retirement savings can be offset by additional taxes that may be imposed for all the following actions. 1040 es Making excess contributions. 1040 es Making early withdrawals. 1040 es Not making required withdrawals. 1040 es For information about these taxes, see chapter 1 in Publication 590. 1040 es Also, a SEP-IRA may be disqualified, or an excise tax may apply, if the account is involved in a prohibited transaction, discussed next. 1040 es Prohibited transaction. 1040 es 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. 1040 es In that case, the SEP-IRA will no longer qualify as an IRA. 1040 es For a list of prohibited transactions, see Prohibited Transactions in chapter 4. 1040 es Effects on employee. 1040 es If a SEP-IRA is disqualified because of a prohibited transaction, the assets in the account will be treated as having been distributed to the employee on the first day of the year in which the transaction occurred. 1040 es The employee must include in income the fair market value of the assets (on the first day of the year) that is more than any cost basis in the account. 1040 es Also, the employee may have to pay the additional tax for making early withdrawals. 1040 es Reporting and Disclosure Requirements If you set up a SEP using Form 5305-SEP, you must give your eligible employees certain information about the SEP when you set it up. 1040 es See Setting Up a SEP , earlier. 1040 es Also, you must give your eligible employees a statement each year showing any contributions to their SEP-IRAs. 1040 es You must also give them notice of any excess contributions. 1040 es For details about other information you must give them, see the instructions for Form 5305-SEP or Form 5305A-SEP (for a salary reduction SEP). 1040 es Even if you did not use Form 5305-SEP or Form 5305A-SEP to set up your SEP, you must give your employees information similar to that described above. 1040 es For more information, see the instructions for either Form 5305-SEP or Form 5305A-SEP. 1040 es Prev Up Next Home More Online Publications
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