Setting Up a SEP Plan
A SEP plan is an employer-established plan.
Employees can neither set up a SEP nor make their own contributions to it. Only you, as the business owner/employer, may set up a SEP Plan and make plan contributions.
If you have no employees, you can set up a SEP for yourself.
Three Steps to Setting Up a SEP
- STEP 1: Formal Written Agreement:
- You must execute a formal written agreement to provide benefits to all eligible employees, including yourself if you're self-employed.
- STEP 2: Provide Information to Employees:
- You must give each eligible employee certain information about the SEP.
- STEP 3: Set Up Traditional SEP-IRA Accounts:
- Once the SEP Plan is established you set up a traditional SEP-IRA for each eligible employee, including yourself as the business owner.
- Employees may set up their own SEP-IRA account at a
qualified financial institution.
- Roth IRAs are not permitted.
STEP 1: Formal Written Agreement
Under a SEP, you, as the employer must:
- Execute a formal written agreement to provide benefits to all eligible employees.
- You may also exclude certain individuals.
How to satisfy the written agreement requirement:
You can satisfy the written agreement requirement and establish a SEP plan by using IRS approved Form 5305-SEP, Simplified Employee Pension -Individual Retirement Accounts Contribution Agreement.
Keep Form 5305-SEP with your records; do no file it with the IRS.
Advantage of using Form 5305-SEP:
- No IRS approval required
- No IRS determination letter required.
- Annual filing of retirement plan information returns with the IRS and Department of Labor usually not required. (See Form 5305-SEP instructions).
Do not use Form 5305-SEP if any of the following are true:
- You currently maintain any other qualified retirement plan.
- You have eligible employees for whom IRAs have not been set up.
- You use the services of leased employees.
- You are a member of any of the following (unless all eligible employees of all the members of these groups, trades, or businesses participate under the SEP):
- An affiliated service group (Section 414(m))
- A controlled group of corporations (Section 414(b))
- Trades or business under common control (Section 414(c))
- You do not pay the cost of the SEP contributions.
Employees Eligible to Participate in a SEP:
An eligible employee must meet three requirements:
- Has reached age 21.
- Has worked for you in at least 3 of the last 5 years.
- Has received at least $550 in compensation from you in tax year 2012.
Tip: You can use less restrictive participation requirements than those listed, but not more restrictive ones.
You can exclude the following employees from coverage under a SEP:
- Employees covered by a union agreement and whose retirement benefits were bargained 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.
SEP: Step 2 - Provide Information to Eligible Employees
You must give each eligible employee the following information:
- A copy of Form 5305-SEP
- Form 5305-SEP instructions
- The other information listed in Form 5305-SEP instructions.
Caution! An IRS model SEP is not considered adopted until you give each employee this information.
STEP 3: Set Up Traditional SEP-IRA Accounts
Once the SEP plan is established, set up a traditional SEP-IRA account for yourself at a qualified financial institution.
The financial institution will help you set up a SEP plan.
If you have employees, a SEP-IRA account must be set up by or for employees at a qualified financial institution to receive employer contributions.
Type of IRA:
A SEP-IRA must be set up as a traditional IRA; it cannot be set up as a Roth IRA.
Roth IRAs: Employer contributions to a SEP-IRA will not affect the amount an individual can contribute to his own Roth IRA.
Where to set up SEP-IRA accounts:
SEP-IRAs can be set up with banks, insurance companies, and other qualified financial institutions.
Contributions are sent to the financial institution where the SEP-IRA is maintained.
You can set up a SEP and make deductible contributions for a particular year as late as the due date of your return (including extensions) for that year.
For example, if you want to set up a SEP for calendar year 2012, you have until April 15, 2013 (including extensions) to establish the SEP and make deductible contributions.
A SEP plan is an employer-established plan. Employees are permitted to set up a SEP or make their own contributions to it.
For Freelancers and independent Contractors
- Organize your financial data into one central accounting system on the cloud
- Software kept up to date.
- Your data kept secure
- Anytime, anywhere data access.
- Pay your quarterly estimated taxes online.
- Export Schedule C to TurboTax at year-end for faster filing.
- Save up to 50% off QuickBooks Self-Employed. Track every deduction! Start your free trial now!
Have an accounting or bookkeeping question? Email it to me.
- Return to the Retirement Plans Table of Contents to find related links