SEP Operating The Plan

Simplified Employee Pension Plan

Operating The Plan


Once in place, a SEP is simple to operate. Your trustee will take care of depositing the contributions,
investments, annual statements, and any required filings with the IRS. You will need to ensure that
your plan is kept current with the law.

Contributions to SEP-IRAs

Your obligation is to forward contributions to your financial institution/trustee for those employees
who participate as described in your plan document. You will want to keep your financial institution
aware of any changes in the status of those employees in the plan. As you hire new employees, for
instance, you will include them in the SEP if they satisfy the eligibility criteria described in the plan.
Your contributions to each employee’s SEP-IRA for a year cannot exceed the lesser of 25 percent
of the employee’s compensation for the year or a dollar amount that is subject to cost-of-living
adjustments. The dollar amount is $54,000 for 2017 and $55,000 for 2018. These limits apply to your
total contributions to this plan and any other defined contribution plans (other SEP, 401(k), 403(b),
profit sharing, or money purchase plan) you have.

You do not have to contribute every year. When you contribute, you must contribute to the SEP-IRAs
of all participants who performed work for your business during the year for which the contributions
are made, even employees who die or terminate employment before the contributions are made.

Contributions for all participants generally must be uniform—for example, the same percentage of

Employee salary reduction contributions cannot be made under a SEP.

There are special rules if you are a self-employed individual. For more information on the deduction
limitations for self-employed individuals, see IRS Publication 560, Retirement Plans for Small
Business (SEP, SIMPLE, and Qualified Plans).

How Does a SEP Work?

Quincy Company decides to establish a SEP for its employees. Quincy has chosen a SEP because its
industry is cyclical in nature, with good times and down times. In good years, Quincy can make larger
contributions for its employees, and in down times it can reduce the amount. Quincy knows that under
a SEP, the contribution rate (whether large or small) must be uniform for all employees. The financial
institution that Quincy has selected to be the trustee for its SEP has several investment funds from
which the Quincy employees can choose. Individual employees have the opportunity to divide their
employer’s contributions to their SEP-IRAs among the funds made available to Quincy’s employees.

Employee Communications

When employees participate in a SEP, they must receive certain key disclosure documents from you
and the financial institution:

  • You must give employees a copy of IRS Form 5305-SEP and its instructions (or other document
    that was used to establish the plan). When new employees become eligible to participate in the
    plan, they also must receive a copy of the plan.
  • You must also provide a written statement containing information about the terms of the SEP,
    how changes are made to the plan, and when employees are to receive information about
    contributions to their accounts. (See Step 3 above.)
  • In addition to the information above, the financial institution provides an annual statement for
    each participant’s SEP-IRA, reporting the fair market value of that account.
  • The financial institution also gives participating employees a copy of the annual statement filed
    with the IRS containing contribution and fair market value information. (See Reporting to the
    Government below.)
  • When an employee participating in the plan receives distributions from his/her account, the
    financial institution sends that employee a copy of the form that is filed with the IRS for the
    individual’s distribution. (See Reporting to the Government below.)
  • The financial institution will notify the participant by January 31 of each year when a minimum
    distribution is required.

Reporting to the Government

SEPs generally are not required to file annual financial reports with the Federal Government. SEPIRA
contributions are not included on the Form W-2, Wage and Tax Statement.

The financial institution/trustee handling employees’ SEP-IRAs provides the IRS and participating
employees with an annual statement containing contribution and fair market value information on
Form 5498, IRA Contribution Information.

Your financial institution also will report on Form 1099-R, Distributions From Pensions, Annuities,
Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., any distributions it makes from
participating employees’ accounts. The Form 1099-R is sent to those receiving distributions and to the


Participants cannot take loans from their SEP-IRAs.

However, participants can make withdrawals at any time. These monies can be rolled over tax-free
to another SEP-IRA, to another traditional IRA, or to another employer’s qualified retirement plan
(provided the other plan allows rollovers). Money withdrawn from a SEP-IRA (and not rolled over to
another plan) is subject to income tax for the year in which an employee receives a distribution. If an
employee withdraws money from a SEP-IRA before age 59 1/2, a 10 percent additional tax generally

As with other traditional IRAs, participants in a SEP-IRA must begin withdrawing a specific minimum
amount from their accounts by April 1 of the year following the year the participant reaches age 70 1/2.
For the year following the year in which a participant reaches age 70 1/2, he/she must withdraw an
additional required minimum distribution amount by December 31 of that year and annually thereafter.
The financial institution/trustee will notify the participant by January 31 of each year when a minimum
distribution is required. (For further details regarding the required minimum distribution amount, see
IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).)

Monitoring the Trustee

As the plan sponsor, you should monitor the financial institution/trustee to assure that it is doing
everything it is required to do. You should also ensure that the trustee’s fees are reasonable for the
services it is providing. If the trustee is not doing its job properly, or if its fees are not reasonable, you
should consider replacing the trustee.


Find out if a Simplified Employee Pension Plan makes sense for your business,
contact Vermillion Financial Advisors today.

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