Simplified Employee Pension A retirement savings plan designed for small businesses Allianz Life Insurance Company of North America Allianz Life Insurance Company of New York AMK-121-N Page 1 of 8
A Simplified Employee Pension (SEP) plan can be a less complicated, cost-effective retirement savings plan for you and your employees. If you are a small-business owner, qualified retirement plans used by larger companies can be too complicated, too costly, and too restrictive to fit your needs. A SEP plan can be an attractive alternative. This less complicated, cost-effective retirement program was designed specifically for the needs of small businesses. Who should consider a SEP plan? Most businesses are eligible to establish a SEP plan. This includes: S and C corporations Sole proprietorships Partnerships Nonprofit organizations Government entities Limited liability companies Why consider a SEP plan? Since SEP plans are technically not qualified plans, there are no complicated reporting requirements. That means they can be maintained with minimal cost and administrative support. For employers, a SEP plan: Provides a desirable retirement benefit to help attract and retain employees Allows them to receive a tax deduction for making SEP plan contributions Enhances their own retirement savings Purchasing an annuity in a retirement plan that provides tax deferral under sections of the Internal Revenue Code results in no additional tax benefit. An annuity should be used to fund an IRA or other qualified plan based on the annuity s features other than tax deferral. These include guaranteed lifetime income and death benefit options. Other factors to consider include fees, expenses, charges, risks, and limitations that may be associated with an annuity. This document is designed to provide general information on the subjects covered. It is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that Allianz Life Insurance Company of North America (Allianz), Allianz Life Insurance Company of New York (Allianz Life of NY), their affiliated companies, and their representatives and employees do not give legal or tax advice. You are encouraged to consult your tax advisor or attorney. Not FDIC insured May lose value No bank or credit union guarantee Not a deposit Not insured by any federal government agency or NCUA/NCUSIF Page 2 of 8
Self-employed sole proprietors and partners With a SEP plan, self-employed sole proprietors and partners can contribute up to 25% of compensation, not to exceed $53,000 in 2015, which is significantly more than the $5,500 (in 2015) limit on contributions that can be made to a traditional or Roth IRA. Because of how a self-employed person s compensation is defined, you, as a self-employed business owner, use a special formula to calculate the contribution to your SEP IRA. Generally, to calculate your maximum contribution, you take your income minus business expenses (net income) minus half of your self-employment tax and multiply that number by 20%. Your tax advisor can help you determine the maximum contribution in your specific situation. Self-employed sole proprietors and partners are in a unique position under a SEP plan, as they enjoy both employer and employee benefits of the plan. They can make a sizeable employer contribution to their SEP IRA and receive the employer tax deduction for making it on their own behalf. How SEP plans can fit the needs of small-business owners Retirement savings programs help employers attract and retain employees. As a growing number of retirees discover that they may have seriously under-saved for retirement (including many who were diligent savers), people in their working years are placing a higher value on retirement savings plans. Saving for retirement may be more important and, at the same time, more challenging than ever. So it s no wonder that workplace retirement plans are considered such a valuable benefit particularly those where the employer makes contributions to a tax-deferred arrangement. Employer contributions allow for the accumulation of funds for retirement and tax-deferred growth potential. Providing a SEP plan for retirement savings can be a smart business decision. Retirement funding: A SEP plan funds your own retirement and helps supplement retirement savings for your employees. Business tax deduction: Employer contributions to a SEP IRA through a SEP plan are tax-deductible. Easier to implement and maintain: A SEP plan is much simpler than many other employer-sponsored plans which require complex testing and reporting. Cost-effective: Less complicated can also mean cost-effective since you re not spending valuable resources on extensive paperwork and bookkeeping. Flexibility: You have the option to decide how much and how often you make SEP plan contributions. And the SEP plan eligibility requirements give employers discretion in excluding certain employees from participating in the plan. Limited liability: Since individual employees control the allocation of employer contributions to their SEP IRAs and are responsible for taking distributions in accordance with tax law, you have limited fiduciary liability. 1 Page 3 of 8
Simplified Employee Pension (SEP plan) SEP plan contributions are made by the employer to the eligible employees SEP IRAs. When using the IRS Model SEP plan, the maximum annual contribution for each participant is 25% of compensation, not to exceed $53,000 in 2015. The employer maintains discretion over annual contribution amounts (if any) up to that maximum. Employer contributions paid to the eligible employees SEP IRAs are tax-deductible to the business, subject to applicable contribution limits. Even if an eligible employee chooses not to participate, you will need to establish and contribute to a SEP IRA for that employee (otherwise the SEP plan may be disqualified). Here s how it works: IRS gives tax deduction to EMPLOYER who sponsors a SEP plan for making contributions to EMPLOYEE SEP IRA where funds accumulate tax-deferred for EMPLOYEE to help fund employee s retirement. Funding options Rollovers and transfers Employees choose the SEP IRA funding vehicle to receive their SEP plan contributions. Various SEP IRA funding vehicles are available. Please consult with your financial professional for options that best fit your business. Distributions from a SEP IRA Since employer contributions to an employee s SEP IRA are 100% vested at the time they are contributed, an employee may take a distribution from their SEP IRA at any time, subject to applicable income taxes. (Prior to age 59½, distributions from a SEP IRA may be subject to a 10% federal additional tax for early withdrawal.) If an employee takes a distribution from their SEP IRA, the employee may roll it over to another IRA or qualified plan within 60 days of receipt with no tax consequences (rollovers between IRAs are allowed once during any 12-month period all of an IRA owner s IRAs are included for purposes of this restriction). If an employee transfers SEP IRA assets from one plan trustee or custodian to another without taking receipt of the funds, there will be no tax consequences. There s no restriction on the number of transfers completed. 2 Page 4 of 8
SEP plan advantages Provides ability to contribute to a tax-deferred arrangement (SEP IRA) for accumulation of retirement funds for you and your employees Desirable retirement benefit to help attract and retain employees Easy to administer: No requirement to file IRS Form 5500 No anti-discrimination testing requirements A summary plan description is not required. Cost-effective: Employer contributions to the employee s SEP IRA are generally tax-deductible as a business expense. If you have employees, you may be eligible to take a nonrefundable income-tax credit for 50% of the first $1,000 of administrative and retirement education expenses you may incur in each of the program s first three years. No start-up or annual program administration fees Flexible: Annual contributions are not mandatory. You can change the amount of your contributions each year, as long as contributions bear a uniform relationship to each employee s compensation. Contributions can range from 0%-25% of compensation, not to exceed $53,000/employee (in 2015). You can base your contributions on profitability, choosing to contribute only during profitable years. Eligible employees who may not be excluded from the plan: Are 21 years of age or older, and Have performed service in the last three of the immediately preceding five years. Have received compensation of $600 or more in 2015. Employers have discretion to include or exclude employees who: Are under age 21. Have performed service in less than three of the immediately preceding five years. Have received compensation of less than $600 in 2015. Are covered by collective bargaining agreements for retirement benefits. Are nonresident aliens who did not earn U.S. source income from the employer. Your liability exposure as the plan sponsor is limited because: Employees choose the funding vehicle for their individual SEP IRAs. Employees are responsible for taking distributions in accordance with tax laws. You are not responsible for administrative decisions on distributions due to divorce, disability, or hardship. SEP plan and SEP IRA points to consider All eligible employees must be covered under the plan. Once employees are eligible, the SEP plan provides limited incentive for them to remain with the business since SEP IRAs are 100% vested, and because employers have discretion on how much (if any) to contribute each year. SEP IRA assets may not be protected from creditors to the extent that assets held in a qualified plan subject to the Employee Retirement Income Security Act (ERISA) may be. Employees cannot make salary deferral contributions through a SEP plan. 3 Page 5 of 8
Simplified Employee Pension (SEP plan) Four steps to establishing a SEP plan using an IRS Model Consult with your tax advisor and financial professional. They can help you determine whether a SEP plan is a good fit for your small business. If you decide to proceed, you have until the due date of your business tax return (plus extensions) to establish and fund a SEP plan. Step 1: Read IRS Form 5305-SEP It explains eligibility requirements, SEP plan requirements, and provides instructions for establishing a SEP plan. Some of the criteria for using form 5305-SEP are: The business must not currently maintain any other qualified retirement plan(s). All eligible employees must have individual SEP IRAs established (or you must establish them on their behalf). The business may not use leased employees. If you have common control in other businesses or affiliated companies, those eligible employees may not be excluded from this plan. You must pay the cost of SEP plan contributions for your eligible employees. You may not provide for employee salary deferral contributions. Step 2: Complete IRS Form 5305-SEP The form s instructions explain your options for eligibility and contributions. As an alternative, you can adopt your own prototype SEP plan. You would do this especially if you want to maintain another qualified plan as well, have leased employees, or are a member of a controlled group. Step 3: Notify your employees The following information is required communication to all eligible employees: A copy of the completed IRS Form 5305-SEP plan or the plan you adopt A statement that IRAs other than the ones that receive your SEP plan contributions may provide different benefits and provisions A statement that eligible employees will receive notice within 30 days of any amendments(s) to the plan, including a copy of the amendment(s) along with written explanation of its effects A statement that eligible employees will receive written notice that a discretionary SEP plan contribution has been made. This must be done no later than January 31 following the year for which the contribution is made or 30 days after the contribution is made whichever is later 4 Page 6 of 8
Step 4: Employees complete individual applications Each eligible employee may choose where they establish their SEP IRA and will be responsible for all decisions on allocating the money you contribute. Depending on the funding vehicle each employee selects, there will be associated fees, costs, and risks which may affect the long-term value of the SEP IRA. Your financial professional can assist each eligible employee in helping them determine which funding vehicle suits their SEP IRA needs and retirement goals, and when that decision is made, help them complete the appropriate applications and forms. (If an eligible employee declines, you are entitled to establish a SEP IRA on their behalf in order to satisfy the plan requirements.) Additional Information Consult your tax advisor for further details regarding SEP plans. Details can be found in IRS Publication 560 and IRS Publication 590-A and 590-B. The publications are available at www.irs.gov or by calling the IRS at 800.829.1040. Contact your financial professional to learn more about how a Simplified Employee Pension (SEP) plan can help meet the needs of your small business. Page 7 of 8
True to our promises so you can be true to yours. As leading providers of annuities and life insurance, Allianz Life Insurance Company of North America (Allianz) and its subsidiary, Allianz Life Insurance Company of New York (Allianz Life of NY), base each decision on a philosophy of being true: True to our strength as an important part of a leading global financial organization. True to our passion for making wise investment decisions. And true to the people we serve, each and every day. Through a line of innovative products and a network of trusted financial professionals, Allianz and Allianz Life of NY together help people as they seek to achieve their financial and retirement goals. Founded in 1896, Allianz, together with Allianz Life of NY, is proud to play a vital role in the success of our global parent, Allianz SE, one of the world s largest financial services companies. While we pride ourselves on our financial strength, we re made of much more than our balance sheet. We believe in making a difference with our clients by being true to our commitments and keeping our promises. People rely on Allianz and Allianz Life of NY today and count on us for tomorrow when they need us most. Guarantees are backed solely by the financial strength and claims-paying ability of Allianz Life Insurance Company of North America and Allianz Life Insurance Company of New York. Variable annuity guarantees do not apply to the performance of the variable subaccounts, which will fluctuate with market conditions. Not FDIC insured May lose value No bank or credit union guarantee Not a deposit Not insured by any federal government agency or NCUA/NCUSIF Products are issued by Allianz Life Insurance Company of North America, 5701 Golden Hills Drive, Minneapolis, MN 55416-1297. www.allianzlife.com. In New York, products are issued by Allianz Life Insurance Company of New York, One Chase Manhattan Plaza, 38 th Floor, New York, NY 10005-1423. www.allianzlife.com/new-york. Only Allianz Life Insurance Company of New York is authorized to offer annuities and life insurance in the state of New York. Variable products are distributed by their affiliate, Allianz Life Financial Services, LLC, member FINRA, 5701 Golden Hills Drive, Minneapolis, MN 55416-1297. www.allianzlife.com (R-3/2015) Page 8 of 8