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What is a Simplified Employee Pension (SEP) plan?
What is a Simplified Employee Pension (SEP) plan?
Updated over a week ago

A Simplified Employee Pension (SEP) plan is a tax-advantaged retirement savings plan for self-employed individuals and business owners. These plans may be an attractive option because they do not require many of the start-up and operating costs of other conventional employer-sponsored retirement plans. Additionally, a SEP plan allows business owners to contribute more to their retirement than a traditional IRA.

Who is eligible to establish a SEP plan?

Almost any business owner can establish a SEP plan, including for a sole proprietorship, corporation, partnership, or a limited liability company. These plans tend to be popular with freelancers, consultants, and contractors, or other small business owners with few to no employees.

The IRS does not require an employer identification number (EIN) to establish a SEP plan. As a result, if you’re filing your business taxes under your Social Security Number, you can use that to establish a SEP plan.

If you’re uncertain whether a SEP plan is the best fit for your company, we recommend consulting your tax advisor.

How does a SEP plan work?

Once you establish a SEP plan, you’ll be required to determine who else may be eligible to participate in the plan. Generally, there are limited employee exclusions allowed under a SEP plan. Those who can be excluded from a SEP plan are employees:

  • Covered by a union agreement, non-resident aliens with no US sourced income, leased employees, or independent contractors

  • Under the age of 21

  • Have not worked for the employer in at least 3 of the last 5 years

  • Earn less than the SEP compensation requirement ($750 for 2023 and 2024)

The eligibility provisions must be included on your SEP document and will apply equally to employees and owners. You should speak to your tax advisor to determine how your employees are classified and if they should be included in your plan. You can also view more about IRS eligibility rules.

How much can an employer contribute to a SEP plan each year?

For the 2024 tax year, a business owner may contribute the lesser of 25% of compensation or $69,000 for each participant ($66,000 for 2023). However, at Guideline, you must contribute the same percentage of salary to all eligible employees.

One benefit of SEP plans is that contributions do not need to be made every year. Therefore, you can choose to not contribute within a year if you’d prefer not to or are not in a position to do so.

Are SEP contributions tax-deductible?

The contributions made to employees’ SEP plans are tax deductible as ordinary business expenses up to certain limits. If you are self-employed, there is a special computation to determine your deductible amount.

See the IRS website for additional details and consult your tax advisor regarding the specific deductible limits applicable to you.

How to get started with a SEP plan with Guideline

If you’re interested in establishing a SEP plan for your business, you can learn more and get started with your Guideline account here. You’ll then be prompted to go through a short onboarding workflow that will help you set up your account.

You’ll need to complete IRS Form 5305-SEP, as this is the document that will establish your plan and set out its eligibility requirements. In addition, if you have eligible employees, you must add them to your SEP and provide them with a copy of your completed Form 5305.

Because in a SEP each eligible employee will have their own individual SEP IRA, Guideline will contact them to let them know they can establish their SEP IRA at Guideline. However, eligible employees do not have to open their SEP IRAs at Guideline and can choose to open an account at any financial institution they chose. If an eligible employee fails to establish a SEP IRA, Guideline will assist you in setting up one on their behalf, as contributions will need to be made even if the eligible employee fails to establish their own SEP IRA.

You are required to notify your eligible employees about any SEP contributions that you make to their SEP IRAs annually. Guideline provides this notice to employees on your behalf annually by distributing a Form 5498 to participants who establish their SEP IRAs at Guideline.

Interested in starting a SEP IRA with Guideline?

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