As Director of Retirement Plan Services, this is a question I hear frequently. A Simplified Employee Pension plan (SEP) is an easy, low-cost option for small business owners to provide retirement benefits for employees (including themselves). This retirement plan option allows for an employer to contribute directly to an individual retirement account for all employees. This easy option reduces start-up and operating costs of a retirement plan due to its simplicity.

The advantages of a Simplified Employee Pension plan are numerous:

  1. Contributions to a SEP are tax-deductible and earnings on the investments do not create taxes for the business owner
  2. Yearly contributions are not required. The decision to contribute and the amount of the contributions are made on an annual basis.
  3. Generally, the employer does not have to file any documents with the government.
  4. Many business structures are able to benefit from SEPs. Sole proprietors, partnerships, corporations (including S corporations) are all able to utilize SEP plans.
  5. A business owner may be eligible for a tax credit of up to 500.00 per year for each of the first three years to offset start-up costs.
  6. Administrative costs are low.

The Simplified Employee Pension plan offers advantages, but there are requirements to be fulfilled to receive these benefits:

  1. Qualifying employees must be 21 and has performed service for at least 3 of the last five years.
  2. All qualifying employees must participate (including part-time, seasonal, deceased, and terminated employees.
  3. Only the employer can contribute to the plan- employees are not able to contribute on their own.
  4. All contributions must be uniform (i.e. same percentage of yearly income, no one can exceed 54,000.00 or 25% of their annual income per 2017 tax limits).
  5. The contribution can be made in multiple contributions up to the filing or one lump sum before filing business taxes.
  6. The decision for the contribution can be made up until the business tax filing deadline.

Once the decision is made to implement the SEP plan there are a few steps to follow:

1.Choose a financial institution to set up the SEP accounts.

  1. Sign a document with the institution defining the name of the employer, requirements for employee participation, a signature of the responsible party, written allocation formula for employer’s contribution.
  2. Inform your employees about their plan and at least annually provide a statement to them.
  3. Deposit contributions by the due date of your tax filing.
  4. Monitor with your financial professional

I am hoping this brief overview of SEP plans has answered the question, “what is a SEP?”. Please contact Helen Hartman CRPC®, Redwood Financial Network, with any further questions and inquiries at 440-287-5020.


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