Retirement Plans FAQs regarding SEPs
Your SEP account is an IRA. SEP-IRAs follow the traditional IRA rules for:
Please see the IRA FAQs for these topics. These FAQs provide general information and shouldn’t be cited as legal authority. Because these answers do not apply to every situation, yours may require additional research.
General
General
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). See Publication 560 for detailed SEP information for employers and employees.
Note: The IRS has a system of correction programs for sponsors of retirement plans, including SEPs, which are intended to satisfy Internal Revenue Code requirements but have not met the requirements for a period of time. This system, the Employee Plans Compliance Resolution System (EPCRS), permits employers to correct plan failures and thereby continue to provide their employees with retirement benefits on a tax-favored basis. How is a SEP established? A SEP is established by adopting a SEP agreement and having eligible employees establish SEP-IRAs. There are three basic steps in setting up a SEP, all of which must be satisfied.
If an employer sets up a SEP plan for its employees, can each employee choose a different financial institution for his or her SEP-IRA? That depends on the SEP plan the employer chooses. Each employee (including the business owner) eligible to participate in the SEP generally must establish his or her own SEP-IRA to receive employer contributions. Although the law does not require each participant’s SEP-IRA to be at the same financial institution, the institution that offers or administers the SEP may require the employer to deposit SEP contributions initially into SEP-IRAs maintained at that institution. Employers should read the SEP plan document carefully and make sure they understand the plan’s terms before signing.
What types of employers can establish a SEP? Any employer can establish a SEP.
If an employer has a SEP, can it also have other retirement plans? An employer can maintain both a SEP and another plan. However, unless the other plan is also a SEP, the employer cannot use Form 5305-SEP; the employer must adopt either a prototype SEP or an individually designed SEP.
If an employee participates in his or her employer's retirement plan, can he or she set up a SEP for self-employment income? Yes. A SEP can be set up for a person’s business even if he or she participates in another employer's retirement plan.
Is there a deadline to set up a SEP? A SEP can be set up for a year as late as the due date (including extensions) of the business’s income tax return for that year.
How is a SEP plan amended for EGTRRA? If a prototype plan was used, the employer should have received an amended plan from the financial institution that provided it with the plan. If for some reason the employer didn't receive a new plan document, the financial institution should be contacted.
While the financial institution provides many administrative services for the plan, it is the responsibility of the employer - the plan sponsor - to ensure that the plan is kept up-to-date with current law.
If a model plan was used, an updated model plan should have been adopted by the end of 2002. See Form 5305-SEP.. Can each partner in a partnership maintain a separate SEP plan? No, only an employer can maintain and contribute to a SEP plan for its employees. For retirement plan purposes, each partner or member of an LLC taxed as a partnership is an employee of the partnership. The partnership:
See also the SEP plan Web pages, Publication 4333, SEP Retirement Plans for Small Businesses, and the SEP Fix-It Guide. Return to General FAQs Participation
An eligible employee is an individual who meets the following requirements:
The employer may use less restrictive requirements to determine an eligible employee.
What is an example of the 3-of-5 rule? Assume an employer has a SEP with a requirement that an employee must work for it in at least 3 of the last 5 years (the maximum requirement) to receive an allocation under the plan. To be eligible for the 2012 year, for example, an employee must have worked for the employer for some time (no matter how little) in any 3 years in the 5-year period 2007 to 2011. Thus, an employee that worked for the employer in 2007, 2010 and 2011, must share in the SEP contribution made for 2012.
Are there employees that may be excluded? Yes, (a) employees covered by a union agreement whose retirement benefits were bargained for in good faith by the employees’ union and the employer; and (b) nonresident alien employees who have no U.S. source compensation from the employer may be excluded.
What happens if an employee elects not to participate? The employer may establish a SEP-IRA on behalf of an employee who is entitled to a contribution under the SEP if the employee is unable or unwilling to establish a SEP-IRA.
Return to Participation FAQs Contributions
How much may be contributed to a SEP? Annual contributions an employer makes to an employee’s SEP-IRA cannot exceed the lesser of:
The limits in the preceding sentence apply in the aggregate to contributions an employer makes for its employees to all defined contribution plans, which includes SEPs. Only up to $250,000 in 2012 and $255,000 for 2013 (subject to annual cost-of-living adjustments for later years) of an employee’s compensation may be considered. Contributions must be made in cash. Property cannot be contributed.
What is considered compensation? Are bonuses and overtime included? Compensation considered is defined by the Internal Revenue Code and would include bonuses and overtime.
How much may a self-employed individual contribute? The same limits on contributions made to employees’ SEP-IRAs also apply to contributions made to a self-employed individual’s SEP-IRA. However, special rules apply when figuring out the maximum deductible contribution. See Publication 560 for details on determining the contribution amount.
Must the same percentage of salary/wages be contributed for all participants? Most SEPs, including the IRS model Form 5305-SEP, require that allocations to all employees' SEP-IRAs be proportional to their salary/wages. A self-employed owner’s contribution is based on net profit minus one-half self-employment tax minus the contribution for him or herself. See IRS Publication 560 on determining the contribution amount.
Can SEP plan participants make tax-deductible IRA contributions to their SEP-IRAs? Employers contribute under a SEP plan to each participant’s SEP-IRA, and a SEP-IRA is generally no different from any traditional IRA. Employer SEP contributions do not affect the amount a participant can contribute to an IRA. So, assuming the SEP-IRA permits non-SEP contributions, regular IRA contributions can be made by the participant to his or her SEP-IRA, up to the maximum annual limit. However, the amount of the regular IRA contribution that can be deducted on the employee’s income tax return may be reduced or eliminated due to the employee’s participation in the SEP plan. See Publication 590, Individual Retirement Arrangements (IRAs), for more information on contribution and deduction limits.
Can catch-up contributions be made to a SEP? No. SEPs are funded by employer contributions only. However, catch-up contributions can be made to the IRAs that hold the SEP contributions if the SEP-IRA documents allow. The catch-up IRA contribution amount (for employees age 50 and older) is $1,000.
Are there other limits on contributions? Yes, if an employer contributes to another defined contribution plan for its employees, for example, a 401(k) plan, an annual addition limit applies. The annual addition limit is the lesser of $50,000 for 2012 and $51,000 for 2013 (subject to annual cost-of-living adjustments for later years) or 100% of the employee's compensation. In determining this limit, contributions for employees to all defined contribution plans of the employer, which includes SEPs, must be included.
Can a contribution be made to a SEP-IRA of a participant over age 70 1/2? Contributions must be made for each eligible employee in a SEP, even if over age 70 1/2. Such an employee must take minimum distributions, however. Must contributions be made to the SEP every year? No, contributions are not required to be made every year, but in years contributions are made to the SEP, they must be made to the SEP-IRAs of all eligible employees.
Do contributions have to be made for a participant who is no longer employed on the last day of the year? A SEP cannot have a last-day-of-the-year employment requirement. If the employee is otherwise eligible, they must share in any SEP contribution. This includes eligible employees who die or quit working before the contribution is made.
What is the timeframe for depositing contributions into SEP-IRAs? The employer must deposit contributions for a year by the due date (including extensions) for filing its Federal income tax return for the year. Note: If the employer extends its tax return then it has until the end of that extension period to deposit the contribution, regardless of when it filed the tax return. However, if the employer did not deposit the contribution timely, it must amend the tax return and pay any tax, interest and penalties that may apply.
The most that may be deducted on the business’s tax return for contributions to its employees’ SEP-IRAs is the lesser of its contributions or 25% of compensation. (Compensation considered for each employee is limited to $250,000 in 2012 and $255,000 for 2013 and subject to annual cost-of-living adjustments for later years.) If the employee is self-employed and contributes to his or her own SEP-IRA, a special computation to figure out the maximum deduction for these contributions must be made. When figuring the deduction for contributions made to a self-employed individual’s SEP-IRA, compensation is net earnings from self-employment which takes into account the following deductions:
See Publication 560 for details on determining the deduction.
My business contributed to our SEP plan after the original due date of income tax return without requesting an extension. Should we have deducted the contributions on that return? No. To get a deduction for a year, you must deposit contributions to your SEP plan by the due date (including extensions) of your business’ federal income tax return for the year. If you apply for and receive an extension to file your tax return, you have until the end of the extension period to deposit the plan contributions, even if you file the return before the end of the extension period.
However, you did not request an extension to file your tax return and did not deposit the SEP plan contributions by the filing due date for that return. Therefore, you are not allowed to deduct any SEP plan contributions on your return.
If you improperly deducted SEP plan contributions on your return, you must file an amended tax return as soon as possible. The contributions may be deductible for the following year’s return..
Are employer contributions taxable to employees? No, contributions to employees’ SEP-IRAs are not included in their gross income, unless they are excess contributions.
What are the consequences to employees if excess contributions are made? If contributions are made in an amount that is more than is allowed, there are tax implications for the employer and the employees. Excess contributions are included in employees' gross income. If an employee withdraws the excess contribution, and earnings on such amount, before the due date for filing his/her return, including extensions, the employee will avoid a 6% excise tax imposed on excess SEP contributions in an IRA. Excess contributions left in the employee’s SEP-IRA after that time may result in adverse tax consequences to the employer and the employee. If the employer contributes more than it may deduct, it may be subject to a 10% excise tax.
If a SEP fails to meet the SEP requirements, are the tax benefits for the employer and employees lost? Generally, tax benefits are lost if the SEP fails to satisfy the Internal Revenue Code requirements. However, the employer can retain the tax benefits if it uses one of the IRS correction programs to correct a failure. In general, when correcting a failure under the program, the correction should put employees in the position they would have been had the failure not occurred. Why is the 2012 contribution that was made in 2013 for the SEP-IRA shown on the 2013 Form 5498 and not on a 2012 Form 5498? The IRS requires that contributions to a SEP-IRA be reported on the Form 5498 for the year they are actually deposited to the account, regardless of the year for which they are made.
Can I contribute to both a SEP-IRA and a Roth IRA? A SEP-IRA is a traditional IRA that holds contributions made by an employer under a SEP plan. An employee can both receive employer contributions to a SEP-IRA and make regular, annual contributions to a traditional or Roth IRA. Employer contributions made under a SEP plan do not affect the amount an employee can contribute to an IRA on their own behalf. Because a SEP-IRA is a traditional IRA, an employee may be able to make regular, annual IRA contributions to this IRA. Any such dollars contributed by the employee to his or her SEP-IRA will reduce the amount that could otherwise be contributed to other IRAs, including Roth IRAs, for the year. Additional Resources: Return to Contributions FAQs
Distributions (Withdrawals) Withdrawals from SEP-IRA accounts follow the rules for traditional IRAs. See the Retirement Plan FAQs Regarding IRAs.
SEP-IRAs follow the investment rules for IRAs. See the Retirement Plan FAQs Regarding IRAs.
Termination of Plan
Does a SEP have to be amended for the new law before it terminates? Generally, the IRS has not required SEPs to be amended for new law prior to termination. Check with your plan professional.
Does a SEP have to be funded in the year of termination? SEPs can be terminated at any time. The employer can stop funding these plans once they are terminated.
What are the notification requirements to participants, etc., when a SEP terminates? When terminating a SEP plan, it is a good idea to notify the employees that the plan has been discontinued. The financial institution that was chosen to handle the plan may need to be notified that there will be no more contributions. The employer may also need to let the institution know that it will terminate the contract or agreement with it. The IRS should not be notified of the plan's termination.
If the employer goes out of business or the employee terminates service, can the amount in a SEP-IRA be left untouched? Yes. Return to Termination FAQs
Have A Question? If I have questions concerning SEPs, where do I go for help? You may direct your technical and procedural questions concerning retirement plans to TE/GE Customer Account Services at (877) 829-5500 (a toll-free number).
Or you may e-mail us at:
RetirementPlanQuestions@irs.gov
Note: All questions submitted via e-mail must be responded to via telephone, so please remember to include your telephone number in your message.
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