+ Who can establish a SEP Plan?
Any employer, including self-employed individuals, can establish a SEP Plan.
+ What is the deadline for establishing a SEP Plan?
The deadline for establishing a SEP Plan is the due date of the business tax return (including extensions) of the year for which the SEP contributions are being made.
+ I work for a company and have my own self-employment income. Can I set up a SEP Plan for my self-employment income if I’m already participating in a retirement plan through my corporate job?
Yes, you can set up a SEP Plan for your self-employment income even if you participate in another retirement plan offered by an employer.
+ Which employees are eligible to participate in my company’s SEP Plan?
You must generally provide plan coverage for employees who are
Note: You may adopt less restrictive requirements to determine which employees are eligible in your SEP Plan.
*$750 in compensation in 2023 from your business
+ What is the contribution limit for a SEP Plan?
Contributions to any one participant’s SEP IRA cannot exceed the lesser of 25% of compensation or $61,000 (2022) (or, $66,000 for (2023)).
+ Must I contribute under the SEP Plan every year?
No, you are not required to contribute every year. However, in years you do contribute, contributions must be made for all eligible employees.
+ What is the deadline for making SEP contributions?
Contributions must be made by the due date of the business tax return (including extensions).
+ Can Roth contributions be made to a SEP Plan?
No. SEP Plan contributions must be made to a Traditional IRA (oftentimes referred to as a “SEP IRA”). Once deposited, however, funds within a SEP IRA may be converted to a Roth IRA.
+ Can I choose to include a vesting schedule in my company’s SEP?
No. Vesting schedules are not permitted under a SEP Plan.
+ Are SEP Plans subject to annual reporting requirements (e.g., IRS Form 5500)?
No, there is no special plan-level government reporting for SEP Plans.
+ How is a SEP Plan different from a SIMPLE IRA Plan?
Both SEP and SIMPLE IRA Plans are attractive for businesses looking for low cost and easy administration as the contributions under each plan are made to employees’ individual retirement arrangements (IRAs).
A SEP Plan is funded exclusively through employer contributions that are made to the Traditional IRAs (often referred to as “SEP IRAs") of each eligible plan participant. The plan sponsor of a SEP Plan decides the plan funding level each year—anywhere from as low as 0% to as high as 25% of each eligible plan participant’s compensation. The maximum amount that may be allocated to any one plan participant’s account is $61,000 for 2022 and $66,000 for 2023.
Although a SIMPLE IRA Plan typically requires a modest employer contribution (i.e., match each employee's salary reduction contribution on a dollar-for-dollar basis up to 3% of the employee's compensation, or make nonelective contributions of 2% of the employee's compensation), it is primarily funded through the individual salary deferral contributions of employees and owner-employees. The maximum salary deferral is $14,000 ($17,000 for participants who are 50 or older) for 2022 and $15,500 ($19,000 for participants who are 50 or older) for 2023. SIMPLE IRA Plan contributions are made to the SIMPLE IRAs of each eligible plan participant.
+ How is a SEP Plan different from a Profit-Sharing Plan?
A SEP Plan is funded exclusively through employer contributions that are made to the Traditional IRAs (often referred to as “SEP IRAs") of each eligible plan participant. The plan sponsor of a SEP Plan decides the plan funding level from each year—anywhere from as low as 0% to as high as 25% of each eligible plan participant’s compensation. The maximum amount that may be allocated to any one plan participant’s account is $61,000 for 2022 and $66,000 for 2023.
Under both a SEP Plan and a Profit-Sharing Plan, you—as the plan sponsor—determine the applicable funding on a year-by-year basis, with contribution levels ranging from 0% to 25% of compensation. The maximum contribution for any one participant under either plan type is $61,000 for 2022 and $66,000 for 2023.
With a Profit-Sharing Plan, you—as the plan sponsor--have greater control over the ongoing administration of the plan (e.g., you can implement restrictions on withdrawals with “distribution triggering events” and impose a vesting schedule). Profit-Sharing Plans may also offer additional plan features such as plan loans. Contributions under a Profit-Sharing Plan are made to a group trust that is administered by the you, the plan sponsor, or by a third-party administrator hired by the plan sponsor.
SEP Plans do not offer as many “bells and whistles” as Profit-Sharing Plans as SEP Plans do not allow restricted access to funds, vesting schedules or plan loans. With SEP Plans the contributions are immediately vested as the contributions are made to the eligible employees’ Traditional IRAs (often referred to as “SEP IRAs"). Because the SEP Plan contributions are made to the IRAs of the eligible employees, SEP Plans are typically less costly and less time consuming to administer.
+ How is a SEP Plan different from a 401(k) Plan?
A SEP Plan is funded exclusively through employer contributions that are made to the Traditional IRAs (often referred to as “SEP IRAs") of each eligible plan participant. Once funds are contributed to each eligible participant’s IRA, the funds are controlled by the plan participant. This provides each plan participant with maximum control over his or her own retirement funds while simultaneously relieving the plan sponsor from the additional burdens and responsibility of ongoing plan administration that accompany plans such as 401(k) Plans. The plan sponsor of a SEP Plan also decides the plan funding level from each year—anywhere from as low as 0% to as high as 25% of each eligible plan participant’s compensation. The maximum amount that may be allocated to any one plan participant’s account is $61,000 for 2022 and $66,000 for 2023.
In contrast, 401(k) Plans are funded through employee payroll deferral contributions with an option to also be funded with employer contributions (e.g., profit-sharing and/or matching contributions). While 401(k) Plans often include an employer funding component, not all types of 401(k) arrangements require employer funding. 401(k) Plans provide tremendous funding flexibility. Under a 401(k) Plan, the employer is generally eligible to make profit-sharing contributions of as little as 0% of compensation or up to as much as 25% of compensation on behalf of each participant. In addition, each employee can elect to make additional “employee deferral” contributions of up to $20,500 ($27,000 if age 50 or older) for 2022 and up to $22,500 ($30,000 if age 50 or older) for 2023. The maximum aggregate contribution that may be allocated to any one employee is $61,000 ($67,500 if age 50 or older) for 2022 and $66,000 ($73,500 if age 50 or older) for 2023.
401(k) Plans also have more of the “bells and whistles” (e.g., options to include distribution restrictions, vesting schedules, plan loans and Roth contributions) that SEP Plans do not have. 401(k) Plans are also typically more costly and more time consuming to administer than a SEP Plan as funds are generally held in a group trust account that is administered by the plan sponsor or by a third-party administrator hired by the plan sponsor. In addition, 401(k) Plans typically require annual government reporting, discrimination testing and professional recordkeeping services.