Eligible employers

Sole proprietors, small companies (both for-profit and tax-exempt) and government entities are all eligible for SEP plans.

Advantages

SEP plans have minimal paperwork and expense, minimal tax filing and no requirement to make ongoing contributions.

For plan participants, SEP plans provide creditor protection at both the federal and state levels.

Eligible employees

Any employee who has worked for three of the past five years and is 21 or older is eligible. Certain employees can be excluded, such as:

• those with annual earnings under $450
• union members covered by a collective bargaining agreement
• nonresident aliens with no source of U.S. income

Employer contributions

• Contributions can vary or not be made at all, depending on profitability, cash flow or other factors.
• Annual allocation to employee’s account is 25% of employee’s compensation, up to a maximum of $44,000 in 2006 ($42,000 in 2005).
• Contributions for self-employed individuals are based on income minus 50% of any self-employment taxes paid and any deductible plan contributions, which effectively reduces the annual allocation to 20% or a maximum of $44,000 in 2006 ($42,000 in 2005).
• Contributions are immediately vested.

SEP employer contributions at various salary levels

Annual salary	5%	10%	15%
$20,000	$1,000	$2,000	$3,000
$30,000	$1,500	$3,000	$4,500
$40,000	$2,000	$4,000	$6,000
$60,000	$3,000	$6,000	$9,000
$80,000	$4,000	$8,000	$12,000
$100,000	$5,000	$10,000	$15,000
$160,000	$8,000	$16,000	$24,000
$220,000+*	$11,000	$22,000	$33,000

^*Currently, only the first $220,000 in annual salary may be considered when calculating contributions.

Employee deferrals

No employee contributions allowed.

Making investments

• Employers with new SEP plans must submit investments electronically. They can be entered individually or uploaded from a spreadsheet. Purchases are funded immediately and directly from the company bank account via Automated Clearing House (ACH).
• Employees can monitor their investments through American Funds’ 24-hour voice response system and website.

Taxes and testing

• Employer contributions are deductible from pretax profits.
• The maximum annual deduction is 25% of employee’s pay or $44,000 in 2006 ($42,000 in 2005), whichever is less.
• Top-heavy and 415 testing are required.
• Annual IRS Form 5500 and Department of Labor filings are not required.

Fiduciary responsibility

• Fiduciaries have limited fiduciary responsibility since Individual Retirement Accounts (IRAs) are set up for each eligible employee, and employees control their own investment choices.
• Educational materials are available from American Funds. Literature on retirement and investment issues, including the Investing for Life Series of brochures and 30-minute lunchtime presentations, can be found in the SEP plan section of Forms & Literature.

Start-up and maintenance fees

• Capital Bank and Trust Company (CB&T), an affiliate of American Funds, is the custodian of the participant IRAs.
• CB&T charges $10 per employee to establish an IRA and an annual maintenance fee of $10 per participant.

Establishment and funding deadlines

Plan establishment

Funding

The employer’s tax filing deadline (including extensions).

Employer contributions: The employer’s tax filing deadline (including extensions). Note: If an employer has chosen to contribute for a plan year but misses the deadline, the employer must still make contributions for eligible participants. Therefore, American Funds will accept such contributions without monitoring the date of receipt. Please consult with a tax adviser to determine any impact to the plan due to a missed deadline.

Aggregating accounts

Aggregation of participant IRA accounts under a SEP plan depends on the plan agreement selected by the plan sponsor. When a plan sponsor signs an American Funds prototype agreement, all plan contributions are required to come to American Funds. When a sponsor selects another prototype of an IRA Model Agreement, some of the contributions may come to American Funds, but the participants are not required to establish an account with American Funds. As a result, accounts will be aggregated as follows:

• Using the American Funds prototype SEP plan agreement will cause the participant account values to be aggregated for reduced sales charges on Class A shares. When the group assets reach a breakpoint, all plan participants benefit from the reduced sales charge. Participants’ accounts will not be linked with personal accounts.
• When the plan sponsor does not use an AFD prototype agreement for the plan, the participants’ accounts will be linked to any other personal accounts they may have with American Funds. This plan may be advantageous for participants already invested in American Funds or those who plan to establish personal accounts in the future