What is an SEP?

Simplified Employee Pension (SEP) plans can provide a significant source of income at retirement by allowing employers to set aside money in retirement accounts for themselves and their employees. Under a SEP, an employer contributes directly to traditional individual retirement accounts (SEP-IRAs) for all employees (including themselves). A SEP does not have the start-up and operating costs of a conventional retirement plan and allows for a contribution of up to 25 percent of each employee’s pay.

Advantages of a SEP

  • Contributions to a SEP are tax deductible and your business pays no taxes on the earnings on the investments.
  • You are not locked into making contributions every year. In fact, you decide each year whether, and how much, to contribute to your employees’ SEP-IRAs.
  • Generally, you do not have to file any documents with the government.
  • Sole proprietors, partnerships, and corporations, including S corporations, can set up SEPs.
  • You may be eligible for a tax credit of up to $500 per year, for each of the first 3 years, for the cost of starting the plan.
  • Administrative costs are low.

Employee – An “employee” is not only someone who works for you, but also someone who receives compensation from the business. In other words, you can contribute to a SEP-IRA on your own behalf. The term also includes employees of certain other businesses you and/or your family own and certain leased employees.

Eligible Employee – An eligible employee is an employee who:

  • Is 21 or older.
  • Has performed service for you in at least 3 of the last 5 years.

All eligible employees must participate in the plan, including part-time employees, seasonal employees, and employees who die or terminate employment during the year.

Your SEP may also cover the following employees, but there is no requirement to cover them:

  • Employees covered by a union contract.
  • Nonresident alien employees who did not earn income from you.
  • Employees who received less than $550 in compensation during the year (subject to cost-of-living adjustments).

The Simplified Employee Pension Individual Retirement Arrangement allows employers to set aside larger amounts of money for their employee’s retirement.

All employees who are 21 or older, who have worked for the employer for at least three of the last five years, and who have at least $550 in annual compensation from the employer must be covered by the plan.

This information was in part, provided by the United States Department of Labor


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