SEP IRA

SEP:  Simplified Employee Pension – Small Employer retirement plan using an IRA as the funding/investment vehicle

Employer Contribution Limits

  • ​​Employer contribution limit is the lesser of 25% of employee’s salary or $57,000 (this amount may be less for highly compensated employees).
  • The employer must contribute an equal percentage for the benefit of all eligible employees with immediate vesting; for example, if a business owner contributes 8% to his or her account, the employer must contribute 8% for all eligible employees, if using IRS Form 5305.
  • Employer contributions only;  employee salary deferrals are not permitted (exception;  SAR-SEP plan);  SAR-SEP plans, established prior to January 1, 2997, permit employee salary deferrals
  • Employer contributions, which are determined on a year-to-year basis, are typically discretionary.

​Employee Eligibility

  • Participant must have been employed by the company during at least three of the last five preceding years
  • Employee must typically be age 21 or older (however, employer can set plan eligibility age at 18) and have received at least $600 in compensation

​Key Points

  • Loans from SEP IRAs are not permitted
  • Distributions are taxed as ordinary income, the same as IRA distributions
  • Less Flexibly than a profit sharing plan or 401(k) plan
  • No filing requirements
  • Limited fiduciary liability
  • More cost-effective administration