A SEP, Simplified Employee Pension, is a retirement plan created to allow self-employed people to put monies aside for their own retirement as well as for their employees without the expense and time of other complex plans. Unlike other plans, a SEP can also accept IRA contributions as well. This is why SEPs are also known as SEP IRAs.

In order to make a contribution to a SEP retirement plan on behalf of oneself and employees, the staff must meet the following criteria:

1. He or she must have reached the age of 21.
2. He or she must have worked for the employer in at least 3 of the last 5 years.
3. They must have received at least $500 in compensation from the employer in 2008.

In tax year 2008, the employer cannot contribute the lesser of $46,000 or 25% of compensation to every eligible employee. All contributions must be in cash. No assets can fund a year's contribution.

All employer contributions must be made for a give tax year by the due date, including extensions, in order for the company to take a deduction.

For a SEP distribution, remember that all distributions could be taxable and subject to penalties. These distributions follow the same rules as Traditional IRA distributions do.

1. The following examples show exceptions to any tax consequence or penalties:

   • Transfers and rollovers are exempt as the SEP IRA retirement plan owner does not take constructive receipt of the funds. This means that the owner cannot deposit the monies in their personal accounts and then return the cash to a SEP product within a set period of time.
   • Return of a portion or all of any non-deductible contributions.
   • Particular contributions being removed or recharacterized.
   • An account that has been closed due to revocation.
2. Any normal distribution to a SEP IRA holder that is 59 ½ or older is not subject to the 10% penalty. These are taxable however.
3. A premature distribution is a distribution of SEP assets to an owner who is under 59 ½. These funds and/or assets are subject to taxes and a 10% premature distribution penalty. There are exceptions to this rule. They are:

   • Death of the SEP IRA holder
   • Disability of the SEP holder
   • Substantially Equal Payments/ 72(t)
   • Medical Expenses
   • Unemployment/Medical Insurance
   • First Time Home Purchase
   • Higher Education Expenses
     Note that Publication 590 will outline these and any other exceptions.
4. Withholding on distributions can be 10% of the distribution amount or any percentage or amount the owner discloses on the distribution paperwork. Or, the client may decide to forego any withholdings. This would also be disclosed on the distribution paperwork.
5. Required Minimum Distribution, RMD, is the mandatory distribution a person takes starting the year that they reach 70½. It is subject to Income Tax but not penalties.