Back when my hardware store was actually making money hand over fist, my accountant talked me into setting up SEP-IRAs for myself and a couple key employees. Seemed like a no-brainer at the time, big contributions, tax deductions, everyone happy. Now I'm getting ready to sell and I'm realizing I never really understood the rules. Anyone else done this? Did it complicate your exit?
Retirement
Setting up SEP-IRAs while the store was still printing cash
SEP-IRAs are usually pretty simple. The main headache for a sale is if you have employees and the buyer wants to terminate the plan. But if it's just you and a couple people, probably not a big deal.
Wait, you set up SEP-IRAs *while* the store was printing cash? That's just called saving money. The real trick is doing it when you're not making anything. Ask me how I know.
How much did you contribute? If you maxed out for years, the balance could be substantial. Buyer might care about plan termination costs but a SEP is easy to shut down compared to a 401k with vesting schedules.
I contributed maybe 20-25% of my net each year for about six years. Not maxed but decent. The key employee thing is what worries me—one of them has been there 15 years and I don't want to screw him over in the sale.
If the buyer is buying the business entity, they inherit the plan. If it's an asset sale, you can terminate the plan before closing. Just make sure your purchase agreement is clear on who handles what.
OP, did your accountant explain that SEP contributions for employees have to be a uniform percentage of comp? If you gave yourself 25% and the key guy got 3%, that's a problem. Might come up in due diligence.
Sue—yes, we did uniform percentage. I'm not that dumb. But thanks for the vote of confidence.
Uniform percentage is required unless you use the integrated formula with Social Security. Most small SEPs just do uniform to keep it simple. You're probably fine. The bigger issue is whether the buyer wants to keep the plan open for your key employee. That's a negotiation point.
Honestly, if the store was printing cash, you should have set up a defined benefit plan and really socked it away. SEP is for amateurs. But too late now.
Ignore Gus. SEP was a reasonable choice. Plenty of businesses your size use them. Good luck with the sale.