Posted on March 10, 2024 by Steve Shorr — 2 Comments ↓

Simplified Employee Pension (SEP) Plan Definition

Introduction
Simplified Employee Pension (SEP)

A simplified employee pension (SEP) retirement plan, is a written plan that allows you to make contributions toward your own (if you are self-employed) and your employees’ retirement without getting involved in a more complex qualified plan.

Under a SEP, you make the contributions to a traditional personal retirement arrangement (called a SEP-IRA) set up by or for each eligible employee. SEP-IRAs are owned and controlled by the employee, and you make contributions to the financial institution – Insurance Company where your SEP-IRA growing in value.

SEP-IRAs are set up for, at a minimum, each eligible employee (defined later). A SEP-IRA may have to be set up for a leased employee (defined earlier under Definitions You Need To Know), but does not need to be set up for non eligible excludable employees (defined later).

Eligible employee.

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.
Has received at least $450 in compensation from you for 2000.

You can use less restrictive participation requirements than those listed, but not more restrictive ones.

Retirement Income Estimator

Excludable employees.

The following employees don’t have to be covered in your SEP.

Employees covered by a union agreement and whose retirement benefits negotiated for in good faith by the employees’ union and you.
Nonresident alien employees who have received no U.S. source wages, salaries, or other personal services compensation from you. For more information about nonresident aliens, see Publication 519, U.S. Tax Guide for Aliens. ^{IRS Information on SEP * FAQ’s}

Forms:

Form 5305-SEP
Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement

Publications:

Publication 3998 Choosing a Retirement Solution for Your Small Business
Publication 560 Retirement Plans for Small Business (SEP, SIMPLE and Qualified Plans)
Publication 590 Individual Retirement Arrangements (IRAs)
Publication 560,
Publication 590-A
and Publication 590-B

FAQ’s – Frequently Asked Questions:

How do I set up a SEP?

You set up a SEP by adopting a SEP agreement and having your eligible employees start SEP-IRAs. There are three basic steps in setting up a SEP, all of which must be satisfied.

You must execute a formal written agreement. You can satisfy this written agreement by adopting an Internal Revenue Service (IRS) model SEP using Form 5305-SEP, Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement. You may also use a prototype SEP that was approved by the IRS. Approved prototype SEPs are offered by banks, insurance companies, and other qualified financial institutions. Additionally, an individually-designed SEP may be adopted.
You must give each eligible employee certain information about the SEP. If you set up the SEP using the Form 5305-SEP, the information must include a copy of the Form 5305-SEP, its instructions, and the other information listed in the Form 5305-SEP instructions. If you use a prototype SEP or an individually-designed SEP, you must provide similar information.
A SEP-IRA must be set up for each eligible employee. SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. The SEP-IRA is owned and controlled by the employee and you send the SEP contributions to the financial institution where the SEP-IRA is maintained.

Other Resources:

2002 EP CPE Text – Chapter 15 – Simplified Employee Pensions (SEPs)
An article on Simplified Employee Pensions (SEPs) published by the Service as part of the Employee Plans Continuing Professional Technical Instruction Program.
2003 EP CPE Text – Chapter 13 – SEP, SARSEP Audit Techniques
An article on SEP, SARSEP Audit Techniques published by the Service as part of the Employee Plans Continuing Professional Technical Instruction Program.
Examination Guidelines – SEPs and SARSEPs
Internal Revenue Manual section 4.72.17 provides guidelines for examining SEPs and SARSEPs.
Simplified Employee Pension (SEP) LRM
Listing of Required Modifications and Information Package for use with prototype SEPs intending to satisfy the requirements of Code section 408(k).
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