Simplified Employee Pension Plan (SEP) | Internal Revenue Service

A SEP design allows employers to contribute to traditional IRAs ( SEP-IRAs ) set up for employees. A clientele of any size, even freelance, can establish a SEP .

Choose a SEP Plan

Simplified Employee Pension ( SEP ) plans can provide a meaning source of income at retirement by allowing employers to set aside money in retirement accounts for themselves and their employees. A september does not have the start-up and operating costs of a conventional retirement design and allows for a contribution of up to 25 percentage of each employee ‘s pay up .

  • Available to any size business
  • Easily established by adopting Form 5305-SEP PDF, a SEP prototype or an individually designed plan document
    • If Form 5305-SEP is used, cannot have any other retirement plan (except another SEP)
  • No filing requirement for the employer
  • Only the employer contributes
    • To traditional IRAs (SEP-IRAs) set up for each eligible employee
    • Employee is always 100% vested in (or, has ownership of) all SEP-IRA money

How does a SEP work?

Jed works for the Rambling RV Company. Rambling RV decides to establish a SEP for its employees. Rambling RV has chosen a SEP because the RV industry is cyclic in nature, with good times and down times. In dear years, Rambling RV can make larger contributions for its employees and in down times it can reduce the total. Rambling RV ‘s contribution rate ( whether large or small ) must be uniform for all employees. The fiscal institution that Rambling RV has chosen for its SEP has several investment funds from which to choose. Jed decides to divide the contribution to his SEP-IRA among three of the available funds. Jed, an employee, can not contribute because SEPs only permit employer contributions.

Pros and Cons:

  • Easy to set up and operate
  • Low administrative costs
  • Flexible annual contributions – good plan if cash flow is an issue
  • Employer must contribute equally for all eligible employees

Who Contributes : employer contributions only .
contribution Limits : total contributions to each employee ‘s SEP-IRA are limited .
Filing Requirements : An employer generally has no filing requirements .
participant Loans : not permitted. The assets may not be used as collateral .
In-Service Withdrawals : Yes, but includible in income and subject to a 10 % extra tax if under historic period 59 1/2 .
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Establish a SEP Plan

The first action you ‘ll need to take is to choose a fiscal institution to serve as regent of the SEP-IRAs that will hold each employee ‘s retirement plan assets. These accounts will receive the contributions you make to the design .

Set-up steps for a SEP

There are three steps to establishing a SEP .

  1. Execute a written agreement to provide benefits to all eligible employees.
  2. Give employees certain information about the agreement.
  3. Set up an IRA account for each employee.

Written agreement

The written agreement must include the mention of the employer, the requirements for employee participation, the signature of a responsible official and a definite allotment formula .
The IRS has a model SEP plan document, Form 5305-SEP, Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement PDF. Do not file this form with the IRS .
You may not habit class 5305 – september if you :

  • Maintain any other qualified plan (except another SEP – a plan is “maintained” even if no contributions were made during the year),
  • Use the services of leased employees,
  • Want a plan year other than the calendar year, or
  • Want an allocation formula that takes into account Social Security contributions you made for your employees.

If you ca n’t use the Form 5305-SEP, you may use a prototype document. A common fund, policy company, bank or other stipulate institution normally provides these. You may besides have a SEP individually designed for your business .

Provide information to participants

You must furnish your eligible employees :

  • Notice that you have adopted the SEP
  • Requirements for receiving an allocation
  • The basis on which the employer contribution will be allocated

If you use form 5305-SEP, you must give your employees a copy of the form and its instructions. The model SEP is not considered adopted until each employee is provided with the follow data :

  1. A statement that IRAs other than the one the employer contributes to may provide different rates of return and contain different terms.
  2. A statement that the administrator of the SEP will provide a copy of any amendments within 30 days of the effective date along with a written explanation of its effects.
  3. The administrator will give written notification to the participant of any employer contributions made to a participant’s IRA by January 31 of the following year.

If you use a prototype or individually designed plan you must give all eligible employees similar information .

Set up a SEP-IRA for each employee

A SEP-IRA must be set up by or for each eligible employee. They may be set up with banks, insurance companies or other restricted fiscal institutions. All SEP contributions must go to traditional IRAs. Employees are responsible for making investment decisions about their SEP-IRA accounts .
You and your employees will receive a argument from the fiscal institutions investing your september contributions both at the time you make the first base SEP contributions and at least once a year after that. Each institution must provide a plain-language explanation of any fees and commissions it imposes on SEP assets withdrawn before the exhalation of a specify time period of time .

Timing of setting up a SEP plan

You can set up a SEP for a year deoxyadenosine monophosphate deep as the due date ( including extensions ) of your business income tax return for the class you want to establish the plan .
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Participate in a SEP Plan

An eligible employee is an individual ( including a freelance individual ) who meets all the keep up requirements :

  • Has reached age 21
  • Has worked for the employer in at least 3 of the last 5 years
  • Received at least $650 in compensation for 2021 and for 2022 from the employer during the year ($600 for 2019 and for 2020)

An employer can use less restrictive engagement requirements than those listed, but not more restrictive ones .
An employer can exclude the be employees from a SEP or SARSEP :

  • Employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees’ union and the employer
  • Nonresident alien employees who do not have U.S. wages, salaries or other personal services compensation from the employer

Example 1 : Employer X maintains a calendar year SEP. The eligibility requirements under the SEP are : an employee must perform avail in at least three of the immediately preceding five years, reach age 21 and earn the minimum measure of recompense during the current year. Bob worked for Employer X during his summer breaks from school in 2016, 2017 and 2018, but never more than 34 days in any class. In July 2019, Bob turned 21. In August 2019, Bob began working for Employer X on a full-time basis, earning $ 30,000 in 2019. Bob is an eligible employee in 2019 because he has met the minimum age requirement, has worked for Employer X in three of the five precede years and has met the minimum compensation necessity for 2019 .
Example 2 : Employer Y writes its SEP design to provide for immediate engagement careless of long time, avail or compensation. John is senesce 18 and began working half-time for Employer Y in 2019. John is an eligible employee for 2019.

Contributions and withdrawals

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Operate and Maintain a SEP Plan

What are the contribution rules?

Employer contributions for each eligible employee must be :

  • Based only on the first $305,000 of compensation for 2022 ($290,000 for 2021, $285,000 for 2020)
  • The same percentage of compensation for every employee
  • Limited annually to the smaller of of $61,000 for 2022 ($57,000 for 2020) or 25% of compensation
  • Paid to the employee’s SEP-IRA

In plan operation, you must follow the definition of compensation stated in the document. Compensation generally includes the pay a player received from you for personal services for a year .
Special computations for self-employed individuals. When figuring the contribution for your own SEP-IRA, compensation is your net earnings from self-employment, less the following deductions :

  • one-half of your self-employment tax and
  • contributions to your own SEP-IRA.

For more data on the discount limitations for freelance individuals, see Publication 560 PDF .
You do not have to contribute every year. When you contribute, you must contribute to the SEP-IRAs of all participants who actually performed personal services during the year for which the contributions are made, even employees who die or terminate employment before the contributions are made .
See the SEP Fix-It Guide for extra information on contribution rules and other information on avoiding common problems in operating a SEP .

When and where are contributions made?

Employer contributions must be made by the ascribable date ( including extensions ) for filing your union income tax recurrence for the year .
You can deduct your contributions and your employees can exclude these contributions from their gross income. september contributions are not subjugate to federal income tax withholding tax, social security, Medicare and federal unemployment ( FUTA ) taxes .
After you send the SEP contributions to the fiscal initiation you selected, that institution will manage the funds. Employees can move their SEP-IRA assets from one traditional IRA to another. september contributions can be put into stocks, reciprocal funds, money market funds, savings accounts and early similar types of investments. Each employee makes the investing decisions for his or her own account .

Who owns SEP contributions?

Contributions to SEP accounts are always 100 percentage vested, or owned, by the employee .

What are the basic withdrawal rules?

SEP contributions and earnings are held in SEP-IRAs and can be withdrawn at any time, submit to the general limitations imposed on traditional IRAs. A secession is taxable in the year received. If a player makes a withdrawal before senesce 59½, broadly a 10 % extra tax applies. SEP contributions and earnings may be rolled over tax-exempt to other IRAs and retirement plans .
SEP contributions and earnings must finally be distributed following the IRA required minimum distribution rules .
Participant loans are not permitted .

Rollovers

You may roll over PDF your SEP-IRA into most IRAs and qualified plans .

What are the filing and notice requirements?

Filing requirements : generally, the employer has no file requirements, including the form 5500 return .
Do not include SEP contributions on employees ‘ Form W-2 PDF, but check the “ retirement plan ” corner in box 13. For more information, see the instructions PDF for Forms W-2 and W-3 .
Notice requirements : Employers must provide employees :

  • a copy of Form 5305-SEP PDF (or the prototype document) and the other documents and disclosures listed in its instructions.
  • notice of any amendments to the SEP and the requirements for receiving contributions.
  • an annual contribution statement.

How can I tell if my plan is operating within the rules?

You should conduct an annual check-up to help determine whether your SEP design is operating within the rules. Checklists and tips are available to help with periodic reviews of your plan .

What are the consequences of making a mistake in operating my plan?

by and large, if the SEP fails to satisfy its legal requirements, tax benefits can be lost. however, any erroneousness can probable be corrected by using one of the IRS discipline programs .
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Correct SEP Plan Errors

Terminate a SEP Plan

If you decide your SEP no long suits your business, consult with your fiscal initiation to determine if another type of retirement plan might be a better pit.

To terminate a SEP, notify the SEP-IRA fiscal institution that you will no long be contributing and that you want to terminate the contract or agreement. It is a good mind to notify your employees that you have discontinued the plan .
You do not need to give any notification to the IRS that you have terminated the SEP .
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