Your employer may sponsor a Simplified Employee Pension Plan, or SEP. SEPs are relatively uncomplicated retirement savings vehicles. A SEP allows employers to make contributions on a tax-favored basis to traditional individual retirement accounts (IRAs) owned by the employees. SEPs are subject to minimal reporting and disclosure requirements.

Under a SEP, you, as the employee, must set up an IRA to accept your employer's contributions. As a general rule, your employer can contribute up to 25 percent of your pay, or $40,000 (whichever is smaller) into a SEP each year.

As of January 1, 1997, employers may no longer set up a type of SEP known as a Salary Reduction SEP. If an employer had a Salary Reduction SEP in effect on December 31, 1996, however, the employer may continue to allow salary reduction contributions to the plan. These amounts are subject to cost-of-living adjustments in future years.

SEP participants may also be required to earn at least $450 (for 2003) to make salary reduction contributions. Employees are generally permitted to contribute the lesser of $12,000 or 25 percent of compensation (up to $200,000) in 2003. Employees 50 and older may make an additional catch-up contribution of $2,000 in 2003. That amount increases in $1,000 increments until the limit of $5,000 is reached in 2006.

Beginning in 1997, employers can set up another type of plan which allows salary reduction contributions, a SIMPLE IRA.

Note: Documents filed with the Labor Department can be obtained by contacting the U.S. Department of Labor, EBSA, Public Disclosure Facility, Room N-1513, 200 Constitution Avenue, NW, Washington, D.C. 20210, telephone: 202.693.8673.

What Are Savings Incentive Match Plans for Employees of Small Employers (SIMPLE IRAs)?

The SIMPLE IRA plan - savings incentive match plan for employees of small employers - gives businesses with 100 or fewer employees an affordable way to offer retirement benefits through employee salary reductions and matching contributions (similar to those found in a 401(k) plan).