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SEP Plans



What is a SEP plan?

A Simplified Employee Pension (SEP) plan is a retirement savings plan adopted by a business that allows the business to make retirement savings contributions for its employees. Each eligible employee sets up a traditional Individual Retirement Account (IRA) to receive the employer SEP contributions.


What are the benefits of a SEP plan?

A SEP plan is easy to establish, simple to administer, and inexpensive compared to other types of retirement plans, such as 401(k) plans. There are no compliance tests and employers are not required to file annual reports with the IRS.


Can any employer establish a SEP plan?

Any type of employer, including a self-employed individual, can establish a SEP plan.


How do I establish a SEP plan?

Establishing a SEP plan requires three steps:

  • • The employer must sign a written SEP plan document. The IRS offers a free SEP agreement (Form 5305-SEP) that can be used to adopt the SEP plan. IRA custodians also provide SEP plan documents.
  • • The employer must notify employees that the SEP plan has been established and provide them with information about the SEP plan.
  • • Each eligible employee must set up a traditional IRA that will receive the contributions. (SEP plan contributions cannot be made to a Roth IRA.)


What is the deadline to establish a SEP plan?

An employer can establish a SEP plan up to the employer’s tax return deadline, including extensions. For example, a sole proprietor who wants to make a SEP plan contribution for 2019 would have until their tax return deadline in 2020 to set up the SEP plan and make a 2019 contribution.


Which employees do I need to cover?

Your SEP plan must cover employees who have

  • • attained age 21,
  • • worked for your business for at least 3 out of the last 5 years, and
  • • received at least $600 in compensation for the year.

You can choose to apply less restrictive eligibility requirements.


Are there employees I can exclude from my SEP plan?

Employees who are covered by a collective bargaining agreement or who are nonresident aliens with no U.S. source income can be excluded, along with employees who haven’t met the eligibility requirements.


How much can I contribute to a SEP plan?

For each employee, including yourself, you can contribute up to 25% of compensation or $57,000 (for 2020), whichever is less. Employer contributions to the SEP plan are tax-deductible on your business tax return. You must generally contribute the same percentage of compensation for each eligible employee.


Am I required to make a SEP plan contribution every year?

You are not required to make a SEP contribution each year and you can vary the amount you choose to contribute each year.


Does the SEP plan limit the amount I can contribute to my IRA?

A SEP plan does not affect your ability to make annual contributions to a traditional or Roth IRA. In addition to your SEP contributions, you can make traditional or Roth contributions of up to $6,000 (for 2020), plus a $1,000 catch-up contribution if you are age 50 or older. Participating in a SEP plan may affect your ability to take a tax deduction for a traditional IRA contribution, depending on your income.  


What can I take money out of my SEP IRA?

You can take distributions from your IRAs, including SEP contributions, at any time. The distribution will typically be included in taxable income in the year of the distribution and may be subject to a 10% early distribution penalty if you are not yet age 59½.