Session 8 SIMPLEs and SEPs

1. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMRetirement Planning & Employee Benefits Session 8SIMPLEs and SEPs

2. Session Details

3. SEP Plans Simplified Employee Pension (SEP) Plans Definition • Employer contributions only • 2014 contribution limit = lesser of 25% of compensation (up to $260,000) or $52,000 • Participant accounts are always 100% vested. • Must be established by due date (including extensions) for filing employer’s return. • IRA distribution and penalty rules apply.

4. SEP Plans Eligibility Requirements for a SEP • Age 21 and over • Performed service during 3 of the immediately 5 preceding years • Earned at least $550 during the current year Example: JR Financial Group, Inc., a calendar-year corporation, maintains a SEP. Matthew began working at the corporation on September 1, 2011. Matthew worked 250 hours in 2011 and 900 hours each year in 2012 and 2013. If Matthew is at least age 21 by the end of 2014 and earns $550 or more during that year (regardless of the number of hours worked), he must participate in the SEP in 2014, even if he quits work before December 31, 2014.

5. SEP Plans: for Employers

6. SEP vs. IRA & Defined Contribution Plan Similarities and Differences

7. SIMPLE IRA Plans Definition Simple IRA plans have the following basic characteristics: • Employer establishes a separate IRA for each eligible employee • Employees may choose to make salary reduction contributions to their IRA • Employer must either make up to a 3% mandatory match or a nonelective contribution equal to 2% of each eligible employee’s compensation • All contributions (employer and employee) are 100% vested

8. SIMPLE IRA Plans Employers Eligible to Establish SIMPLE IRAs • All employees (except certain union and nonresident employees) employed during the calendar year are counted for purposes of the 100-employee limit • Employers with no more than 100 employees who earned $5,000 or more in compensation during any two preceding calendar years (two-year grace period exception) • Employer cannot maintain any of the following retirement plans in which employees accrue benefits: qualified plan, SEP, 403(a) or (b) plan, or government plan (other than a Section 457 government plan)

9. SIMPLE IRA Plans Employees Eligible to Participate in a SIMPLE IRA • Each employee who received at least $5,000 in compensation during any two preceding years AND who is reasonably expected to receive at least $5,000 in compensation during the current year must be eligible to participate in the SIMPLE IRA. • Union employees whose retirement benefits were the subject of good-faith bargaining and certain nonresident aliens may be excluded.

10. SIMPLE IRA Plans Required Employer Contributions to a SIMPLE IRA Plan • Match deferrals dollar-for-dollar up to 3% of compensation (or match at a lower rate not less than 1% for two of every 5 years), or • Make a 2% nonelective contribution – even if an employee doesn’t make any salary reduction contributions • Employer contributions are always 100% vested • Employer contributions must be made by the date the employer’s tax return is due (including extensions) • Employer contributions are tax deductible

11. SIMPLE IRA Plans Rules for Employee Contributions to a SIMPLE IRA • Deferrals (salary reduction contributions) are allowed up to $12,000 (2014) • Catch-up contributions are permitted for employees age 50 and over up to $2,500 (2014) • Deferrals are always 100% vested • Deferrals are excluded from taxable income, but are taxed as ordinary income when distributed (same as IRA rules) • Deferrals must be forwarded to a participant’s SIMPLE IRA no later than the 30th day of the month following the month in which they were withheld from the employee’s paycheck

12. SIMPLE IRA Plans SIMPLE IRA Enrollment Requirements • An employer must notify each employee of his or her right to make salary reduction contributions under the plan and the contribution alternative elected by the employer • An employee must be notified and given the opportunity to make or change a salary reduction choice under a SIMPLE IRA plan before the beginning of the election period • The election period (60-day period) runs from November 2 to December 31 of the preceding calendar year

13. SIMPLE IRA Plans

14. SEP vs. SIMPLE

15. SEP vs. SIMPLE

16. SEP vs. SIMPLE

17. Multiple Choice Question 1 Which of the following could be disadvantages of a SEP from the employer’s point of view? • mandatory annual contributions • statutory eligibility requirements • $12,000 (indexed) deferral limit in 2014 • lack of vesting schedules • III only • I and III only • II and IV only • II, III, and IV only

18. Multiple Choice Question 2 Which one of the following is not a basic provision of a SEP? • individual ownership of accounts • 25% limit on employer contributions • forfeiture reallocations based on compensation • plan must not discriminate in favor of highly compensated employees

19. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMRetirement Planning & Employee Benefits Session 8End of Slides