Simplified Employee Pension Plans (SEP IRAs)

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Simplified Employee Pension Plans (SEP IRAs)

Employers looking for a low-cost, easy-to-administer employer-sponsored retirement plan ought to consider the plans available under the IRS IRA code sections.

What are they?

A simplified employee pension (SEP) plan is an individual retirement account to which employers can contribute. Employees with retirement benefits already established by union agreements may not participate in SEP IRAs. Other employees may participate if they meet the following qualifications:

• They are at least 21.
• They have performed services for their company for at least three years during the immediately preceding five years.
• They have received from their employer at least $750 in annual compensation in 2025, in at least three of the immediately preceding five years.

An employer can establish less restrictive participation requirements for its employees than those listed, but not more restrictive ones.

Contribution limits

The SEP rules permit an employer to contribute (and deduct) each year to each participating employee’s SEP-IRA up to 25 percent of the employee’s compensation or $70,000 for 2025, whichever is less.

An employer who signs a SEP agreement does not have to make any contribution to the SEP IRAs that are set up. But, if the employer does make contributions, the contributions must be based on a written allocation formula and must not discriminate in favor of highly compensated employees.

Employees are not allowed to make their own contributions to their SEP-IRAs; only employers are.

The Secure 2 Act, passed in late 2022, now allows Roth versions of SEPs.