SEP Contributions

Who Contributes to SEP-IRA Accounts?

Only the employer makes contributions to SEP-IRA accounts.

Nothing is withheld from an employee's pay (unless the SEP plan is a Salary Reduction Simplified Employee Pension (SARSEP) started before 1997).

After 1996, SARSEPs could no longer be established. However, if an employer has been operating one since before 1997, the plan may continue to operate and even allow new employees to participate in it.

Can Property be Contributed to a SEP-IRA?

Contributions must be in the form of money (cash, check, or money order). However, participants may be able to transfer or roll over certain property from one retirement plan to another. See IRS publication 590 for rollover and other IRA information.

 

Vesting in a SEP-IRA

Contributions to a SEP-IRA are immediately 100% vested; they belong to the plan participant.

No Strings Attached to SEP Contributions

An employer cannot make contributions on the condition that any part of them must be kept in the employee's SEP-IRA account.

Time Limit for SEP Contributions

You can set up a SEP-IRA and make contributions for a particular year as late as the due date of your income tax return, plus extensions. For example, to deduct contributions for calendar year 2014, you can establish the plan and make deductible contributions as late as April 15, 2015, plus extensions.

No Contribution Requirements for SEP-IRAs

You do not have to make contributions to a SEP-IRA every year. This is a handy feature to have in a year when cash is short, especially if you have employees participating in the plan.

However, when you make contributions:

  • They must be based on a written allocation formula.
  • They must not discriminate in favor of:
    • Yourself
    • Owners with a more than a 5% interest in business capital or earnings or
    • Highly compensated employees (see below).
  • They must be made 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.

Highly compensated employees:

A highly compensated employee is one, who for the preceding year:

  • Owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or
  • For the preceding year, received compensation from the business of more than $115,000 (if the preceding year is 2013 or 2014; $120,000 if the preceding year is 2015), and, if the employer so chooses, was in the top 20% of employees when ranked by compensation.

File your personal and small business taxes (Schedule C)