The IRS recently identified a few common errors seen in one of the most popular retirement plans used by small businesses — the SEP plan.
General Rules for SEPs
With a SEP (Simplified Employee Pension) plan, employers establish individual retirement accounts (IRAs) for each eligible employee. Contributions are made only by the employer.
Contributions are tax deductible by the employer. For 2016, the maximum contribution for each employee is the lesser of 25% of annual compensation (up to $265,000) or $53,000. Employees are not taxed on employer contributions until they are withdrawn from the plan.
Errors Commonly Seen by the IRS
Discrimination in employer contributions. Plans may not discriminate in favor of owners and highly compensated employees. Contributions must be at the same percentage rate for all eligible employees.
Improper exclusion of employees. Eligible employees include all those who have (1) reached age 21, (2) performed services for the employer during at least three of the immediately preceding five years, and (3) received at least $600 in compensation.
Failure to take required minimum distributions (RMDs). All SEP participants must begin taking RMDs at age 70½, whether or not they are still working.