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SEP Plan

• What is a SEP?

What are the contribution requirements?

What type of employers can establish a SEP?

What is a SEP?

A SEP is a simplified employee pension plan. A SEP plan provides employers with a simplified method to make contributions toward their employees' retirement and, if self-employed, their own retirement. Contributions are made directly to an Individual Retirement Account or Annuity (IRA) set up for each employee (a SEP-IRA).

What are the contribution requirements?

By establishing a SEP, you the employer, have adopted a plan that requires an IRA to hold the contributions made on behalf of each of your eligible employees.  A SEP is funded by employer contributions. Check your SEP plan documents for the amounts you have agreed to contribute.

Total contributions to each employee's IRA cannot exceed the lesser of (the preset dollar amount for each year specified, which may be subject to cost-of-living adjustments for later years) or 25% of pay. Each employee is always 100% vested in (or, has ownership of) all contributions to his or her SEP-IRA.

After you send the SEP contributions to the financial institution, the financial institution will manage the funds.  Depending on the financial institution, SEP contributions can be invested in individual stocks, mutual funds, and other, similar types of investments.

Each participating employee must receive an annual statement stating the amount contributed to the account for the year.

What are the basic distribution/withdrawal rules?

SEP contributions and earnings can be withdrawn at any time. A withdrawal is taxable in the year received. If an employee makes a withdrawal before he or she is age 59 1/2, generally a 10% additional tax applies. SEP contributions and earnings may be rolled over tax free to other IRAs and retirement plans.

SEP contributions and earnings must eventually be distributed. A specific minimum amount is required to be distributed by April 1 of the following year you reach age 70 1/2. 

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