SEP Plan Overview

Simplified Employee Pension Plan



A SEP is a Simplified Employee Pension plan. To establish a SEP, the employer:

• Can be a business of any size, even self-employed
• Must adopt a SEP plan document

Any employer – including a sole proprietorship, partnership, corporation and nonprofit organization – with one or more employees may establish a SEP plan. This includes a self-employed business owner, regardless of whether he or she is the only employee of the business. Individual employees may not establish a SEP plan.

Under a SEP, the employer contributes to traditional IRAs set up for eligible employees (including self-employed individuals), subject to certain limits. A SEP is funded solely by employer contributions. Each employee is always 100% vested in (or, has ownership of) all money in his or her SEP-IRA.

There are three basic steps in setting up a SEP.

• Execute a formal written agreement to provide benefits to all eligible employees.
• Give employees certain information about the SEP.
• Set up a SEP-IRA for each eligible employee.

Who is eligible to participate?

Generally, any employee who performs services for the business must be included in a SEP. However, there are some exceptions to this general rule. Among the employees that you may exclude from a SEP are those who:

• Haven’t worked for you during three out of the last five years.
• Haven’t reached age 21.
• Are employees who are covered by a union agreement and whose retirement benefits were bargained for in good faith by you and the employees’ union.
• Are nonresident alien employees who have received no U.S. source wages, salaries or other personal services compensation from you.
• Received less than $600 in compensation (subject to cost-of-living adjustments) during 2015 and 2016 ($550 in 2009 through 2014). Gross wages reported on Form W-2 can be used to determine if an employee is eligible to participate.

What are the contribution requirements?

By establishing a SEP, you’ve adopted a plan that requires a SEP-IRA to hold the contributions made for each of the eligible employees. A SEP is funded by employer contributions. The SEP plan document will indicate the amounts you’ve agreed to contribute. This amount can be discretionary, including zero. The SEP document must include a definite written allocation formula for determining how the contribution is allocated to the employees’ SEP-IRAs.

SEP contributions must bear a uniform relationship to compensation. Generally, a uniform relationship means that each employee’s contribution must represent the same percentage of compensation. Nonuniformity is possible with a permitted disparity formula (see IRC Section 408(k)(3)(D). The amount of compensation taken into account under the plan cannot exceed $265,000 in 2015 and 2016, and is subject to cost-of-living adjustments for later years. “Compensation” may be gross wages reported on Form W-2, or an alternative definition.

Total contributions to each employee’s SEP-IRA cannot exceed the lesser of $53,000 for 2015 and 2016, (subject to cost-of-living adjustments for later years) or 25% of compensation. Each employee is always 100% vested in (or, has ownership of) all contributions to his or her SEP-IRA.

After you send the SEP contributions to the financial institution, it will manage the funds. Depending on the financial institution, SEP contributions can be invested in individual stocks, mutual funds and other, similar types of investments.

Each participating employee must receive an annual statement stating the amount contributed to the SEP-IRA for the year.