Chapter 24
SIMPLIFIED EMPLOYEE PENSION (SEP)
LEARNING OBJECTIVES:
A. Have a basic understanding of the simplified employee pension (SEP).
REVIEW:
This chapter discusses the Simplified Employee Pension (SEP). Advantages and
disadvantages are discussed following a section on when an employer might
want to use a SEP. Tax implications are covered next, followed by a chart
comparing small business retirement plans. The chapter includes information on
how to install a plan, and highlights use of Form 5305-SEP for meeting ERISA
requirements. IRS Publications 334 and 535 are referred to for more information.
CHAPTER OUTLINE:
A.
B.
C.
D.
E.
F.
G.
H.
I.
What Is It?
When Is It Indicated?
Advantages
Disadvantages
Tax Implications
How To Install A Plan
ERISA Requirements
Where Can I Find Out More About It?
Chapter Endnotes
FEATURED TOPICS:
Simplified Employee Pension (SEP)
FIGURE:
Figure 24.1 Small Business Retirement Plans Compared
1
Chapter 24
CFP® CERTIFICATION EXAMINATION TOPIC:
Topic 63: Other tax-advantaged retirement plans
A. Types and basic provisions
3) SEP
COMPETENCY:
Upon completion of this chapter, the student should be able to:
1. Have a basic understanding of the simplified employee pension (SEP).
KEY WORDS:
simplified employee pension (SEP), salary reduction SEP (SAR-SEP)
DISCUSSION:
1. Discuss SEP contributions from both the employee and employer
perspectives.
2. Discuss comparisons between a SEP, SAR-SEP, SIMPLE IRA, and
Solo 401(k) plan, using Figure 24.1.
QUESTIONS:
1. Which one of the following is true regarding the plan adoption date for a SEP?
a. it must be adopted before the end of the year in which it is to be effective
b. it must be adopted by the end of the current tax year, but contributions can
be made until the tax return filing date
c. it can be adopted as late as six-months after the tax return filing date for
the year
d. it can be adopted as late as the tax return filing date (including extensions)
for the year in which it is to be effective
Chapter 24, p. 203
Chapter 24
2. What is the minimum vested percentage for an employee’s SEP account at
the end of the second year of contributions?
a.
b.
c.
d.
25%
50%
75%
100%
Chapter 24, p. 203
3. Which of the following is true about required employer contributions to a
SEP?
a.
b.
c.
d.
contributions must be recurring and substantial
no contribution needs to be made in any given year
a minimum of 2% must be contributed into all eligible employee accounts
plan contributions can discriminate in favor of highly compensated
employees
Chapter 24, p. 204
4. Which of the following are true about employer contributions to a SEP?
(1) employer contributions to a SEP reduce the amount that can be deducted
for contributions to a qualified plan maintained by the same employer
(2) employer contributions are made directly into an employee’s traditional
IRA
(3) SAR-SEP salary reductions are subject to FICA and FUTA taxes
(4) employer contributions are not deductible to the employer, but will be
deductible to the employee
a.
b.
c.
d.
(1) and (3) only
(1) (2) and (3) only
(2) (3) and (4) only
(1) (2) (3) and (4)
Chapter 24, p. 206
ANSWERS:
1. d
Chapter 24
2. d
3. b
4. b