Simplified Employee Pension (SEP) Plans

A SEP plan is an employer-sponsored, tax-favored retirement plan that offers small businesses an attractive alternative to standard profit-sharing plans.

How Does a SEP Plan Work?

In a SEP plan, an employer deposits contributions into each participant’s IRA rather than into an employer trust account, thereby simplifying the accounting process. Unlike a traditional qualified plan, a SEP doesn’t involve an extensive written plan document, plus has the benefit of minimal compliance reporting and disclosure requirements.

To be valid for any given tax year, the SEP plan document must be executed and the SEP IRA accounts established and funded by the due date of the employer’s tax return, including extensions.

SEP Plan Eligibility & Contributions

The employer must make a contribution on behalf of any employee who is at least 21 years old and has worked for the business in any three of the preceding five years, provided that, in the year the employee becomes eligible, they earn more than the minimum indexed compensation amount. This requirement applies to both full- and part-time employees.

The employer may set less restrictive age or service requirements, but the eligibility rules must be applied consistently to all employees, including owner-employees.

A SEP plan is employer-funded and is 100% vested at all times.

Advantages of a SEP Plan

  • A SEP plan is easy to set up and is comparable to an employer establishing and funding a“company provided IRA” for the benefit of each employee.
  • There are no requirements for a separate employer trust document and administrative costs are minimal.
  • Employers sponsoring SEP plans are not required to file annual plan returns (IRS Form 5500) in contrast to employers sponsoring qualified pension or profit-sharing plans.
  • SEP plan offers tax-planning and contribution flexibility, allowing employers to establish a SEP plan until its tax-filing deadline. This is unlike qualified pension or profit-sharing plans, which must be in place no later than the last day of the plan year.