IRA Rules

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Many people have had questions of late about the SEP IRA rules. This article covers the rules and structure of Simplified Employee Pension plans, better known as the SEP IRA. 

First of all, a SEP IRA is a type of IRAs that works like pension. In a SEP plan the employer opens an IRA account for every eligible employee, hence the name SEP-IRA. 

All SEP plans are funded only with employer contributions. Employees never make contributions to their SEP-IRA retirement account at all. Any money that goes into a SEP automatically belongs to the employee, and the employer has no claim to that money ever again. The employee has the right to take his SEP IRA account money with him whenever he or shee stops working for the company. 

Any business of any size can open a SEP account, but not surprisingly, this type of account is most used by the self-employed and small businesses with few employees. SEP IRA rules are simple to follow and the benefits of SEP IRA retirement plans often outweigh other types of retirement plans. 

Here’s the part people get hung up on: The SEP IRA rules dictate that if the business contributes for one employee, (i.e., the owner), then the business must contribute at the rame rate for all of the employees! With just a few exceptions, anyone who works for the business must be included in the SEP plan. 

It’s a tough rule for employers to put up with. Luckily there are a couple of exclusions. 

Employers can stop employees from participating in the SEP plan who: 

1. Have not worked for the company during three out of the last five years.
2. Have not reached age 21 during the year for which contributions are made.
3. Has received less than $450 in compensation (subject to cost-of-living adjustments) during the last year.

That pretty much narrows it down to the older, harder-working, more senior employees. When dealing with smaller businesses, especially family businesses, the SEP Ira Rules would seem to be ideal to ensure that all employees are treated fairly. 

Larger businesses should think very carefully before considering a SEP IRA.