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SEP - Simplified Employee Pension Plan

A SEP is a Simplified Employee Pension plan. Because this is a simplified plan, the administrative costs should be lower than for other, more complex plans.  Under a SEP, employers make contributions to traditional Individual Retirement Arrangements (IRAs) set up for employees, subject to certain percentage-of-pay and dollar limits.

SEPs are funded through employer contribution to employee-owned individual retirement accounts. As with profit sharing plans, these contributions can vary from year to year, and can be as high as 25% of payroll for eligible employees.

  • Inflexible allocation formulas and immediate vesting requirements mean benefit levels will be relatively equal throughout your organization.

  • Part-time employees must be included.
    No government filings are required.

  • A SEP plan is for businesses that do not want the administrative complexity of a traditional pension plan.

To note the difference between a Salary Reduction SEP (SAR-SEP) and a SIMPLE IRA - Click Here

To establish a SEP, you:

  • Can be a business of any size, even self-employed.

  • Adopt Form 5305-SEP, a SEP prototype or an individually designed plan document.

  • Cannot have any other retirement plan (except another SEP) if the model Form 5305-SEP is used to establish the SEP.

You cannot use the IRS "Model SEP" if you currently maintain any type of qualified retirement plan or have ever maintained a pension plan for yourself and your employees that promised to pay specific benefits at retirement -- a "defined benefit" pension plan. You also cannot use the Model SEP if you have any eligible employees for whom accounts have not been established. For this purpose, eligible employees include certain individuals who have a specific relationship to the employer. For example, eligible employees for purposes of SEP contributions include "leased employees", and members of an "affiliated" or "commonly controlled" group of employers of which you are a member. These are technical terms that are defined in the Internal Revenue Code. For example, the term " leased employees" is defined in section 414(n) of the Code. The term, "affiliated group" is defined in Code section 1504, and the term "controlled group" is defined in Code section 1563. If you believe any of these terms apply to you, you should consult a professional advisor.

Although using the IRS Form 5305-SEP is an easy way to set up a SEP, you do not have to use this model agreement. Many financial institutions have their own SEP arrangements that have been approved by the Internal Revenue Service. In addition, employers may design their own SEP subject to the legal requirements.

If you use a non-model SEP, the law allows you to take into account Social Security contributions you made for your employees. If you want to do this, consult your professional advisor.

A SEP has a life cycle with four distinct stages. This page offers a basic understanding of the life cycle of a SEP.

See the SEP Resource Library for forms, publications, frequently asked questions, etc.

Is your SEP working properly? Checkout the SEP Checklist - Click Here. May we convert a plan for you?

For Professional Consultation Services Contact:
Executive Benefit Plans, Inc.
Suite 1188
1186 Route 56 East
Apollo, PA 15613-9725 USA

Phone: 800-622-2411 or Fax: 724-478-1688
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Information is provided for review and consideration only. Please consult legal and tax advisors for practical advice pertaining to your business and personal situations.

This page was last reviewed and/or updated on Friday, July 03, 2015 05:21 PM


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