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A SEP is similar to a profit sharing plan in terms of the amount that can be contributed to the plan. However, unlike a profit sharing plan, employer contributions are deposited into an individual retirement account in the name of the participant. Withdrawal restrictions that generally apply to profit sharing plans do not apply to these types of accounts and the IRA rules govern instead.

A SEP can require as much as three years of employment in the immediately preceding five years. However, employees are considered to have had a year of employment if they earn at least $450 in compensation. Once an employee meets the specified requirements, they are fully vested in their accounts when contributions are made.

Establishing a SEP can be as easy as completing an IRS Form 5305-SEP. Tax returns are not required on this type of plan; however, the plan sponsor may need some assistance from a third party administrator in order to accurately calculate the contributions that can be made on an annual basis.

 

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