Despite the numerous advantages of qualified retirement plans, small business owners may not want to commit to the time and expense of setting up and maintaining one. If you feel that way, you may find a Simplified Employee Pension, or SEP, to your liking. 

A SEP can be a relatively easy, low-cost way to provide retirement benefits. It's essentially a form of IRA arrangement since you, as employer, would make contributions to your own IRA and the IRAs of your employees. However, the amount that can be contributed and deducted to each account is much higher than the amount that can be put into a regular IRA. 

Although a written plan is required, start-up costs for a SEP generally are low because you don't have to create a plan from scratch. The SEP is governed by the rules for IRAs. Reporting requirements also are minimal. Other advantages: participants choose their own investments, and you, as the plan sponsor, don't have to commit to making contributions every year. If you don't feel you can make a contribution in any particular year, you don't have to.

If you do decide to make a contribution for a year, you must make one for all qualifying employees, based on a written allocation that does not discriminate in your favor or in favor of your family members or highly compensated employees. Generally, you must contribute the same percentage of compensation for other employees as you do for yourself. If you set up a SEP, it must cover all employees who earn more than a few hundred dollars a year, are at least 21 years old, and have worked for you during at least three of the past five years. 

A possibly negative SEP feature is that participants are fully vested in their contributions as soon as you make them. Some employers view this as a disadvantage. Gradual vesting, that is available with regular qualified retirement plans, may give employees more incentive to remain with the employer.

A SEP IRA may be converted to a Roth IRA under the same general rules that apply to traditional IRAs. However, once a SEP IRA has been converted to a Roth IRA, it is treated as a Roth IRA for all purposes, and future contributions under the SEP may not be made to the Roth IRA. 

If you do decide on a SEP, you might even be able to set one up and get some deductions for a tax year that is already past. The deadline is the income tax return due date for the year, plus filing extensions.  

If you think a SEP might be a good plan for you, please contact your C&L tax professional.