A SEP basically provides employer-sponsored Individual Retirement Accounts (IRAs).  The employer makes discretionary contributions (from 0% to 25% of the employee's compensation) by contributing to IRAs established for plan participants and owned by the participants.

Since compensation for 2008 SEP contributions is the participant's first $230,000, the maximum $46,000 under §415(c) can be reached (25% X $230,000 = $57,500, capped at $46,000).

This change also makes regular SEPs comparable to qualified profit sharing plans. Until the technical corrections, SEPs were not as attractive as profit sharing plans. Employers will now be able to achieve the same contribution and deduction limits with a regular SEP as they would with a profit sharing plan. SEPs generally have less administrative requirements than qualified plans.

Unfortunately, this simplicity does not come without some disadvantages:

• There are stricter coverage and vesting requirements for SEPs than for other defined contribution plans

• More employees, such as certain part-time employees, may have to be included in the plan

• Favorable lump sum tax treatment is not available

• All contributions to a SEP must be 100% vested immediately and participants are entitled to withdraw amounts at any time.

01/01/2008