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SEP Plans

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Setting Up a SEP Plan

A SEP plan is an employer-established plan.

Employees can neither set up a SEP nor make their own contributions to it. Only you, as the business owner/employer, may set up a SEP Plan and make plan contributions.

If you have no employees, you can set up a SEP for yourself.

Three Steps to Setting Up a SEP

STEP 1: Formal Written Agreement:
- You must execute a formal written agreement to provide benefits to all eligible employees, including yourself if you're self-employed.
STEP 2: Provide Information to Employees:
- You must give each eligible employee certain information about the SEP.
STEP 3: Set Up Traditional SEP-IRA Accounts:
- Once the SEP Plan is established you set up a traditional SEP-IRA for each eligible employee, including yourself as the business owner.
- Employees may set up their own SEP-IRA account at a qualified financial institution.
  - Roth IRAs are not permitted.

STEP 1: Formal Written Agreement

Under a SEP, you, as the employer must:

Execute a formal written agreement to provide benefits to all eligible employees.
You may also exclude certain individuals.

How to satisfy the written agreement requirement:

You can satisfy the written agreement requirement and establish a SEP plan by using IRS approved Form 5305-SEP, Simplified Employee Pension -Individual Retirement Accounts Contribution Agreement.

Keep Form 5305-SEP with your records; do no file it with the IRS.

Advantage of using Form 5305-SEP:

No IRS approval required
No IRS determination letter required.
Annual filing of retirement plan information returns with the IRS and Department of Labor usually not required. (See Form 5305-SEP instructions).

Do not use Form 5305-SEP if any of the following are true:

You currently maintain any other qualified retirement plan.
You have eligible employees for whom IRAs have not been set up.
You use the services of leased employees.
You are a member of any of the following (unless all eligible employees of all the members of these groups, trades, or businesses participate under the SEP):
- An affiliated service group (Section 414(m))
- A controlled group of corporations (Section 414(b))
- Trades or business under common control (Section 414(c))
You do not pay the cost of the SEP contributions.

Employees Eligible to Participate in a SEP:

An eligible employee must meet three requirements:

Has reached age 21.
Has worked for you in at least 3 of the last 5 years.
Has received at least $500 in compensation from you in tax year 2008.

Tip: You can use less restrictive participation requirements than those listed, but not more restrictive ones.

Excludible Employees:

You can exclude the following employees from coverage under a SEP:

Employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you.
Nonresident alien employees who have received no U.S. source wages, salaries or other personal services compensation from you.

SEP Plans: Setting Up a SEP: STEP 2; STEP 3: Set Up Traditional SEP-IRA Accounts

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