Simplified Employee Pension (SEP) plans are sometimes regarded as the "no-brainer"
first choice for many high-income small business owners who do not currently have
tax-advantaged retirement plans set up for themselves because of the generous amounts
that can be contributed. Unlike other types of retirement plans, a newly formed SEP is
easy to establish and a powerful retroactive tax planning tool. SEPs are available to
self-employed individuals, partnerships (including multimember LLCs treated as
partnerships), and corporate employers alike.
On the downside, (1) SEP contributions must be made for all eligible employees using
the same percentage of compensation as for the owner, and (2) employee accounts are
immediately 100% vested. Of course, these apply only if the business has employees
other than the owner.
Contributions to SEPs are discretionary. The business can decide what amount of
contribution it will make each year. The contributions are made to SEP-IRAs
established for each eligible employee.
For 2014, the maximum contribution that can be made to a SEP-IRA is 25% of
compensation (or 20% of self-employed income net of the self-employment tax
deduction) of up to $260,000, subject to a contribution cap of $52,000. For example,
for 2014, a sole proprietor with $100,000 of net self-employment earnings could
contribute up to $20,000 to his or her SEP-IRA.
Establishing a SEP is easy
A SEP plan is established by completing and signing the very simple Form 5305-SEP
("Simplified Employee Pension - Individual Retirement Accounts Contribution
Agreement"). Form 5305-SEP is not filed with the IRS, but it should be maintained as
part of the self-employed person's or employer's permanent tax records. A copy of
Form 5305-SEP must be given to each employee covered by the SEP along with a
If employer contributions are made for a year, they must be made on behalf of all
eligible employees and may not discriminate in favor of highly compensated persons.
For 2014, an eligible employee for SEP participation purposes is one who has (1)
attained age 21, (2) performed any services for the employer during at least three of
the preceding five years, and (3) received at least $550 in compensation.
Annual reporting requirements
SEPs have no annual reporting requirements with the IRS. However, the employer must
give each participating employee an annual statement of contributions. If the
contribution is made before year end, the information should be included on the
employee's Form W-2. If the contribution is made after year end (but on or before the
due date of the employer's income tax return for the year), the employee should be
notified on a separate statement by the later of (1) 30 days after the contribution
is made or (2) January 31 following the calendar year for which the contribution was
If you think a SEP plan might be good for your business, please give us a call.
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opinions on specific facts or matters, and, accordingly, assume no liability
whatsoever in connection with its use. The information contained in this newsletter
was not intended or written to be used and cannot be used for the purpose of (1)
avoiding tax-related penalties prescribed by the Internal Revenue Code or (2)
promoting or marketing any tax-related matter addressed herein. © 2015