SEP IRA Account
Summary
Simplified Employee Pension (SEP) plans provide a simplified method for a company to make contributions to a retirement plan for its employees. As the business owner, instead of setting up a profit-sharing or money purchase plan with a trust, you can adopt a SEP agreement and make contributions directly to a Traditional IRA set up for yourself and each eligible employee. Each SEP IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP IRA is maintained.
An eligible employee is an individual who meets all the following requirements:
- Has reached age 21
- Has worked for you in at least 3 of the last 5 years
There are three basic steps in setting up a SEP:
- You must execute a formal written agreement to provide benefits to all eligible employees
- You must give each eligible employee certain information about the SEP
- A SEP IRA must be set up by or for each eligible employee
Contributions
You can contribute a limited amount of money each year to your account, if self-employed, and each employee’s SEP IRA. You can contribute only money (cash, check, or money order) and not property. However, participants may be able to transfer or roll over certain property from one retirement plan to another. Unlike regular contributions to a Traditional IRA, contributions under a SEP can be made to participants over age 70½, including yourself, as a self-employed owner.
You do not have to make contributions in any year, but if you do, they must be based on a written allocation formula and must not discriminate in favor of highly compensated employees and must be given to all participants who actually performed personal services during the year, including employees who die or terminate employment before the contributions are made. To deduct contributions for a year, you must make the contributions by the due date (including extensions) of your tax return for the year.
Deducting Contributions
Generally, you can deduct the contributions you make each year to each employee’s SEP IRA. Contributions are not taxable or reported as income to employees. If you are self-employed, you must make a special computation to figure your maximum deduction for these contributions.
Distributions
As an employer, you cannot prohibit an employee from authorizing distributions from a SEP IRA nor make your contributions on the condition that employees keep any part in the SEP IRA account. Distributions are subject to most of the same IRA rules for Traditional IRAs.
Additional Taxes
As with Traditional IRAs, the tax advantages of using SEP IRAs for retirement savings can be offset by additional taxes that may be imposed for all the following actions:
- Making excess contributions
- Making early withdrawals
- Not making required withdrawals
Also, like Traditional IRAs, a SEP IRA may be disqualified, or an excise tax may apply, if the account is involved in a prohibited transaction.
Reporting and Disclosure Requirements
You must give your eligible employees certain information about the SEP when you set it up and provide a statement each year showing any contributions to their SEP IRAs and any excess contributions.
Disclaimer
The content provided on this page is for informational purposes only and does not constitute a complete analysis of the rules governing the creation and use of a Simplified Employee Pension Individual Retirement Account (SEP) IRA. It is intended to provide an overview only of the benefits, eligibility requirements, and funding limitations of SEP IRAs. For complete details regarding this type of savings plan, including definitions of a qualified compensation, distributions, and tax reporting, refer to IRS Publication 560.
