• Simplified Employee Pension Plan. A SEP plan is an employer-sponsored qualified retirement plan that can be established by a corporation, a partnership or a sole proprietorship for the benefit of its employees. In the case of an unincorporated business, a partner or sole proprietor is considered an employee for contribution purposes, and must meet the same participation requirements as any other employee.

  A SEP plan offers employers the benefits of simplified plan administration and reporting requirements, when compared to other types of employer-sponsored qualified retirement plans. A SEP plan consists of individual IRAs established by each participating employee, to which the employer then contributes. The employee is vested immediately in his or her SEP/IRA. The employer must adopt a written SEP plan document that describes the plan's participation requirements, contribution formula, available investment options, and distribution methods. An employer's annual contributions to each participating employee's SEP/IRA cannot exceed the lesser of 25 percent of annual compensation or $41,000 (adjusted annually for inflation). These employer contributions are tax deductible by the employer and excluded from each participant's gross income.

  The SEP document specifies the investment vehicles a participant can select from to accept his or her SEP/IRA contributions. These can include annuities and mutual funds. Life insurance, however, cannot be used to fund a SEP/IRA.

• Self-Employed (HR-10) & Corporate Retirement Plans (Pension/Profit-Sharing/401(k) Plans). Prior to the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), different rules and requirements applied to qualified plans established by the self-employed (sole proprietors and partners). TEFRA, however, established parity between the qualified retirement plans available to corporations and those available to the self-employed. As a result, the rules and requirements that apply to the following plans are largely the same for all businesses:

  Pension Plans — which promise to pay a specific retirement benefit to each participating employee, or to make a specific annual contribution based on each participating employee's compensation.

  Profit-Sharing Plans — into which an employer contributes a portion of profits for the future benefit of participants.

  401(k) Plans — which are qualified cash or deferred arrangement (CODA) plans into which employees can elect to contribute a portion of their salary, rather than taking it in cash.

You will learn more about these qualified retirement plans in the ON-Trac II Qualified Retirement Plans, Unit XXI.