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Types of Retirement Plans - Simplified Employee Pension (SEP)

A SEP is a written plan that allows self-employed individuals to make retirement contributions on their own behalf and on behalf of their employees without the complexity of a qualified plan.

  1. SEP-IRA - Under a SEP, the self-employed individual makes contributions to a traditional IRA set up by or for each eligible employee. The SEP-IRA is owned and controlled by the employee.
  2. Eligible employee - An employee who meets all of the following requirements:
    • Age 21 or older.
    • Employed for at least three of the last five years.
    • Received at least $550 in compensation (2014, adjusted for inflation).
    • Employees covered by a union agreement may be excluded who retirement benefits were bargained for in good faith.
  3. Contribution limits - The lesser of:
    • 25% of the employee's compensation, or
    • $52,000 (2014, indexed for inflation).
    • Compensation for self-employed individual is based on net earnings, which takes into account the deduction for one half of self-employment tax and the deduction for contributions to a SEP-IRA.
  4. Deducting contributions - Contributions to a SEP are deductible up to the above contribution limits.
  5. Contribution deadline - Due date of employer's income tax return (including extensions).
  6. Deadline for setting up a plan - Due date of employer's income tax return (including extensions).
SIMPLE plans
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