The ABCs of the SEP

If you own your own practice, you know how important it is to retain key staff members who know your systems, your patients, and how to work with you. Besides income and work environment, one of the key ways you can encourage staff to stick around is through offering great benefits. But how can you compete with a large dental practice or health system when it comes to providing retirement benefits?

One option you may want to consider is establishing a simplified employee pension plan (SEP)—a form of an individual retirement account (IRA) specifically designed for business owners like yourself. SEPs offer a greater individual contribution limit than a traditional IRA, and business owners are eligible for such accounts alongside your staff members. They are also generally well-liked because of their low paperwork and the fact they don’t generally involve much tax reporting.

The Basics

An SEP allows self-employed individuals to contribute to retirement plans for themselves or their employees without involvement in a complex qualified plan. The employer is allowed a tax deduction for contributions made to the SEP plan and makes contributions to each eligible employee’s SEP IRA on a discretionary basis. Many small employers like SEP plans because of the low eligibility requirements, and because of a special feature of SEPs that allow participants to skip contributions in years when income may be less than expected.

While the set-up may sound quite a bit like a regular IRA account, the key difference is that both Roth and traditional IRAs have very low maximum contribution limits. But for an SEP IRA, the limit is 25% of an employees’ compensation, up to $53,000 in 2016. For an employee whose income is $85,000, you can contribute up to $21,250 toward their retirement. That contribution is not considered part of an employees’ income, so it won’t increase their income tax liability.

SEPs also have advantages over 401(k) and other retirement plans in that they can be invested in many different vehicles, including stocks, bonds, exchange-traded funds, and a host of other options. Employees who wish to invest separately in an IRA can continue to do so. Also, employees are always 100% vested in the accounts, so the contributions made belong immediately to your staff member.

A Couple Things to Consider

You can’t use an SEP as an informal bonus system. Employers contributing on behalf of multiple employees must be made at the same rate (such as 10% of income) for each employee covered under the SEP. That percentage, however, can change from year to year, so that everyone can share the wealth during particularly profitable years in the practice, but a bad year won’t mean bankrupting your practice. If your employee needs the cash value of the SEP, he or she cannot take a loan against it, like some 401(k) plans offer, and there is an early withdrawal penalty for taking distributions before a person is 59 ½.

There are other limits to know about, which you can read about on the IRS website about SEPs.