SEP IRA (Simplified Employee Pension)

One of the key attributes that distinguishes IRA-Based Plans from Qualified Plans is the fact that contributions for IRA-Based Plans such as SEP Plans are made to IRA accounts that are individually established and maintained by each participating employee.

With regards to plan coverage, one of the unique characteristics of SEP Plans is that the employer can choose to require that an employee work for the company for up to three years before he or she is eligible to participate in the SEP Plan.  While this is a moot point if your business doesn’t have employees, or if your objective is to cover employees who have worked for you for less than three years, this feature can be very appealing to some business owners who are looking to minimize or avoid coverage of shorter-term employees.

Perhaps the biggest drawback to the SEP Plan is that it does not allow for employees to make salary deferral contributions (except from some grandfathered SEP Plans established many years ago). That said, if allowing salary deferral contributions is not a priority and/or if you’re looking to exclude short-term employees from plan coverage, the SEP Plan option can be an extremely cost-effective option that provides many of the same tax benefits as more sophisticated and costly plans such as 401(k) plans.