When self-employed people go looking for last-minute tax deductions at this time of year, their search often leads them to something called a simplified employee pension plan, or SEP.
To anyone who has ever dealt with the ins and outs of pension-plan rules, the mere use of the words "simplified" and "pension" in the same breath may suggest a contradiction in terms.But at least in comparison with many other types of retirement planning setups, SEPs are relatively straightforward. What's more, they combine some of the most attractive features of individual retirement accounts and Keogh plans for the self-employed.
These days, the ranks of the self-employed are large indeed - including not only owners of full-time businesses, but also moonlighters, freelancers and consultants of many stripes.
In the days coming down to the April 15 income-tax filing deadline, SEPs have a special allure.
If you are going to take a deduction for a 1990 contribution to a Keogh plan, you can make that contribution anytime up until the due date of your return - but the plan must have been set up by Dec. 31 of last year.
Not so with an SEP, which can be started up until April 15, or even later, if you make the proper request for an extension of the tax filing deadline.
Says William Brennan, editor of Ernst & Young's monthly Financial Planning Reporter, "Maybe you have been reluctant to adopt a retirement plan because you have heard that they are complicated and expensive to establish and administer.
"If so, a simplified employee pension plan may change your mind."
In an SEP, the employer contributes money to what amounts to an IRA for each employee, who is free to decide where and how to invest the money within the broad limits of the rules that govern IRAs.
This arrangement helps to hold down the paperwork. "There are no annual filings to the Internal Revenue Service, and no annual disclosure requirements other than reporting contributions on the employees' W-2s," Brennan observes.
"Most of the accounting is done by the IRA trustee-financial institutions, and the employer's fiduciary responsibility is minimal."
At the same time, SEPs are not bound by the usual $2,000 limit for annual contributions to an IRA.
As in a Keogh plan, the yearly SEP contribution can go as high as 15 percent of an employee's earnings (or a little more than 13 percent of self-employment income), up to $30,000 a year.
"Contributions are discretionary," Brennan adds. "They don't have to be made every year, and when they are made they don't have to match those made in prior years."