facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause
SEP IRAs-- How Small Business Owners & Self-employed Can Benefit from These Savings Tools Thumbnail

SEP IRAs-- How Small Business Owners & Self-employed Can Benefit from These Savings Tools

Simplified Employee Pension (SEP) plans can provide a significant source of income at retirement by allowing employers to set aside money in retirement accounts for themselves and their employees. A SEP does not have the start-up and operating costs of a conventional retirement plan and allows for a contribution of up to 25 percent of each employee's pay.

  • Available to any size business
  • Easily established by adopting Form 5305-SEPPDF, a SEP prototype or an individually designed plan document
    • If Form 5305-SEP is used, cannot have any other retirement plan (except another SEP)
  • No filing requirement for the employer
  • Only the employer contributes
    • To traditional IRAs (SEP-IRAs) set up for each eligible employee
    • Employee is always 100% vested in (or, has ownership of) all SEP-IRA money

How does a SEP work?

Sam works for Marlin Fishing Equipment.  Marlin Fishing decides to establish a SEP for its employees. Marlin Fishing has chosen a SEP because the fishing equipment industry is cyclical in nature, with good times and down times. In good years, Marlin Fishing can make larger contributions for its employees and in down times it can reduce the amount. Marlin Fishing's contribution rate (whether large or small) must be uniform for all employees. The financial institution that the employer has chosen for its SEP has several investment funds from which to choose. Sam decides to divide the contribution to his SEP-IRA among three of the available funds. Sam, an employee, cannot contribute because SEPs only permit employer contributions.

Pros and Cons:

  • Easy to set up and operate
  • Low administrative costs
  • Flexible annual contributions – good plan if cash flow is an issue
  • Employer must contribute equally for all eligible employees

Who Contributes: EMPLOYER ONLY  

Employer contributions for each eligible employee must be:

  • Based only on the first $305,000 of compensation for 2022 ($290,000 for 2021, $285,000 for 2020)
  • The same percentage of compensation for every employee
  • Limited annually to the smaller of of $61,000 for 2022 ($57,000 for 2020) or 25% of compensation
  • Paid to the employee's SEP-IRA

Filing Requirements: An employer generally has no filing requirements.Contribution Limits: Total contributions to each employee's SEP-IRA are limited.

NO LOANS are permitted against SEP IRAs. They may not be used as collateral.

In-Service Withdrawals: Yes, but includible in income and subject to a 10% additional tax if under age 59 1/2.

Let Fiduciary EDGE Advisors help you or your employer set-up or move your SEP IRA Plan:

There are three steps to establishing a SEP, Fiduciary EDGE Advisors will walk you through each step:

  1. Execute a written agreement to provide benefits to all eligible employees.
  2. Give employees certain information about the agreement.
  3. Set up an IRA account for each employee.

 The Written Agreement: Will include the name of the employer, the requirements for employee participation, the signature of a responsible official and a definite allocation formula.

The IRS has a model SEP plan document, Form 5305-SEP, Simplified Employee Pension - Individual Retirement Accounts Contribution AgreementPDF. No need to file this form with the IRS.

You may not use Form 5305 - SEP if you:

  • Maintain any other qualified plan (except another SEP - a plan is "maintained" even if no contributions were made during the year),
  • Use the services of leased employees,
  • Want a plan year other than the calendar year, or
  • Want an allocation formula that takes into account Social Security contributions you made for your employees.

If you can't use the Form 5305-SEP, you may use a prototype document. A mutual fund, insurance company, bank or other qualified institution usually provides these. You may also have a SEP individually designed for your business.

Provide information to participants

You must furnish your eligible employees:

  • Notice that you have adopted the SEP
  • Requirements for receiving an allocation
  • The basis on which the employer contribution will be allocated

If you use Form 5305-SEP, you must give your employees a copy of the form and its instructions. The model SEP is not considered adopted until each employee is provided with the following information:

  1. A statement that IRAs other than the one the employer contributes to may provide different rates of return and contain different terms.
  2. A statement that the administrator of the SEP will provide a copy of any amendments within 30 days of the effective date along with a written explanation of its effects.
  3. The administrator will give written notification to the participant of any employer contributions made to a participant's IRA by January 31 of the following year.

If you use a prototype or individually designed plan you must give all eligible employees similar information.

Set up a SEP-IRA for each employee

A SEP-IRA must be set up by or for each eligible employee. They may be set up with banks, insurance companies or other qualified financial institutions. All SEP contributions must go to traditional IRAs. Employees are responsible for making investment decisions about their SEP-IRA accounts.

You and your employees will receive a statement from the financial institutions investing your SEP contributions both at the time you make the first SEP contributions and at least once a year after that. Each institution must provide a plain-language explanation of any fees and commissions it imposes on SEP assets withdrawn before the expiration of a specified period of time.

Timing of setting up a SEP plan

You can set up a SEP for a year as late as the due date (including extensions) of your business income tax return for the year you want to establish the plan.