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