General SEP Rules



SEP, or Simplified Employee Pension Plan, is a retirement savings vehicle where employers contribute directly to traditional individual retirement accounts (or SEP-IRA accounts) for themselves and their employees. There is no start-up or operating cost in SEP unlike in conventional retirement plans and it is subject to only minimal disclosure and reporting requirements. Contributions made by employers are subject to tax deduction. The employee will not be subjected to tax until distributions are made from their respective SEP-IRA accounts. Note, however, that since the SEP IRA account is a traditional IRA account, the distribution rules that apply to traditional IRA assets will also apply here.



Any employer may establish an SEP plan including sole proprietorships, corporations, partnerships (LLCs), and non-profit organizations with one or more employees. Among the advantages of setting up a SEP, aside from the tax deduction and non-taxable earnings on investments related to SEP, include the flexibility of the amount and time of contributions made, low administrative cost, and minimal documentation and reporting requirements.

The employer has the flexibility to choose eligibility qualifications for the plan, however, in general, an employee should be at least 21 years old and should have performed service for the company for at least 3 of the last 5 years (this means any 3 years out of the last 5 years employment, not necessarily sequential) and must have at least $500 in annual compensation. This also includes part-timers and seasoned employees, those who die or quit their jobs before contributions are made. All eligible employees should participate in the plan. Also, an employer may opt to exclude employees covered by a union agreement or non-resident alien employees who have not earned income from the company.

Eligible compensation is based on W-2 wages for common-law employees, Schedule C income for sole proprietors, and Schedule K-1 income for partners in partnerships. It is the option of the employer to include those employees with compensations that exceed $230,000. An employer may contribute up to 25% of the eligible employee's income as long as the contribution does not exceed $46,000. The contributions must be made by the tax-filing deadline.