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SEP IRA Vs SIMPLE IRA - Quick Reference Guide-- 2012

Last Updated September 12, 2012

Small business owners, who like the simplicity and low administrative costs associated with simplified employee pension (SEP) IRAs and savings incentive match plan for employees of small employers(SIMPLE) IRA plans, often find it hard to choose between the two. An understanding of the features and benefits of these plans can help to make the choice easier. This Appleby Quick Reference Guide provides a comparison of some of the key features and benefits of these plans.

 
SEP IRA Vs SIMPLE IRA 2012| Features and Benefits
Plan
Eligible Employer
Age Requirement
Service  and compensation requirement
Salary deferral allowed
Maximum contributions allowed for employee
SEP IRA
Any employer. Employers who use the services of leased employees or maintain any other retirement plan cannot use the form 5305-SEP, but may use a prototype or individually designed SEP
Can exclude employees under age 21
Must include employees who worked at least 3 of the 5 preceding years.  
Can exclude employees who earn less than $550 during the year.
Not for 5305-SEP. Up to $17,000 + catch-up of $5,500 may be allowed under a Salary deferral SEP (SARSEP).  Note: As of 01/01/97, new SARSEPs may not be created.
Lesser of 25% of  compensation or $50,000
SIMPLE IRA
Any employer, providing the employer had no more than 100 employees with $5,000 or more in compensation during the preceding year.
Generally, the SIMPLE IRA must be the only plan maintained by the employer
N/A
Must include employees who received at least $5,000 in compensation during any 2 preceding calendar years (whether consecutive or not) and are reasonably expected to receive at least $5,000 in compensation during the calendar year
Yes. Up to $11,500 + catch-up of $2,500
$11,500 deferral + employer match of up to 3% of compensation+ catch-up of $2,500
 

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Plan
Deductible contribution limit
Limitation on Compensation
Vesting of Contributions
Deadline to Establish Plan
Deadline for making contributions
SEP IRA
25% of eligible compensation of all eligible employees
Compensation cap of $250,000   applies.
100% immediate vesting
Employer’s tax filing deadline, including extensions
Employers tax filing deadline, including extensions
SIMPLE IRA
Up to the SIMPLE IRA contribution limits. Not to exceed  allowed contribution limits
Compensation cap applies only to employer 2% non-elective contribution
100% immediate vesting
October 1. Except for businesses that are created after October 1, for which the plan must be established as soon as is administratively feasible
Salary deferrals- within 30 days, following the end of the month to which the deferral applies. 
Employer contributions –employer’s tax filing deadline, including extensions
 
 
Plan
Nondiscrimination testing
5500 filing
Complexity
Administrative cost
Notable notes
SEP IRA
N/A
N/A
Low
Low
Gives business that has not established a profit pattern or one that experiences fluctuation in profits, flexibility due to discretionary contribution feature
SIMPLE IRA
N/A
N/A
Low
Low
Employers often overlook the annual notification requirements that apply to SIMPLE IRAs, resulting in them being subject to penalties
 
Ideally suited for …
SEP IRA
Employers who are looking for a plan in which contributions are immediately 100% vested is easy/inexpensive to administer, has a discretionary feature for contributions. Also advantageous for employers who do not mind the fact that employees can take their contributions at anytime
SIMPLE IRA
Employers who are looking for a plan in which contributions are immediately 100% vested, is easy/ inexpensive to administer, has a mandatory feature for employer contributions,  allows employees to share the cost of funding their accounts. Also advantageous for employers who do not mind the fact that employees can take their contributions at anytime
Disclaimer: Appleby Quick Reference Guidescannot be used as substitution for tax advice. Individuals must consult with their tax professionals for assistance with determining which plan is suitable for their businesses.

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