An employer may sponsor a simplified employee pensionplan or SEP. SEPs are relatively uncomplicated retirement savings vehicles. A SEP allows employers to make contributions on a tax-favored basis to individual retirement accounts (IRAs) owned by the employees. SEPs are subject to minimal reporting and disclosure requirements.
Under a SEP, the employee must set up an IRA to acceptthe employer's contributions. As a general rule, the employer can contribute up to 25 percent of the employee's pay into a SEP each year, up to a maximum of $40,000.
Starting January 1, 1997, employers may no longer setup Salary Reduction SEPs. However, the Small BusinessJob Protection Act of 1996 (Public Law 104-188) permitted employers to establish SIMPLE IRA plans beginning in 1997. A SIMPLE IRA plan allows salary reduction contributions up to $6,000 in2001 ($7,000 in 2002).
