SEP contributions are made on a discretionary basis, which means the employer decides each year whether to make contributions to the plan.
SEP contributions in excess of certain limits must be corrected in accordance with regulatory requirements in order to avoid penalties. The requirements vary depending on the type of excess contribution. Employers who make excess SEP contributions should consult with their SEP providers or a tax professional regarding corrective measures.
An employer may contribute up to 25% of an eligible employee's compensation for a year, provided the contribution does not exceed $55,000 (indexed) for 2018. Employee compensation in excess of the compensation cap of $275,000 (indexed) for 2018, is not considered when calculating SEP contributions. The compensation cap is the maximum compensation that may be considered for employer-plan purposes.
An employer is eligible to receive a tax deduction for contributions made to the plan, within established IRS regulatory limits.
An employer may choose from several IRS-approved formulas to allocate contributions to employees' SEP IRAs:
SEP employer contributions must be made to each employee's SEP IRA by the employer's tax-filing deadline (including extensions).
Salary-deferral SEPs allow eligible employees to make salary-deferral contributions to their SEP IRAs. These contributions are made on a pretax basis. In addition to these salary-deferral contributions, the employer may also make SEP (employer) contributions to each eligible employee's SEP IRA.
Effective for tax years beginning January 1, 1997, new SARSEPs could no longer be established. Employers that established SARSEPs prior to January 1, 1997, are allowed to continue maintaining these plans. Here's how they work:
SARSEP Employer Eligibility Requirement
An employer is eligible to maintain a SARSEP only if the employer meets the following requirements:
Salary Deferral-Contribution Limits
Salary-deferral contributions cannot exceed certain limits, and amounts deferred in excess of these limits must be removed from the employee's SEP IRA. Excess contributions require special administrative handling and will be subject to penalties if not removed within a specific time frame.
The salary-deferral limit for a SARSEP is $18,500 for 2018. Eligible employees who are at least 50 years old by the end of the year may make an additional contribution of $6,000.
Other rules could place additional limits on salary-deferral contribution amounts. Employees should consult with their employer and/or SEP IRA provider regarding limitations.