What is a Simplified Employee Pension Plan (SEP)?
A SEP is a qualified retirement plan set up as an individual retirement account (IRA) in an employee’s name. You can establish a SEP for yourself if you own a small business, or you may participate as an employee if you work for a company that sponsors such a plan. The federal government outlines the requirements for participation, the maximum annual contribution limits, and the rules governing withdrawals. Contributions are tax deductible for a business and earnings are tax-deferred. Qualified individuals can contribute a fixed percentage of their earned net income (up to $30,000 maximum annually). Early penalties may apply.
A Simplified Employee Pension Plan (SEP) is a relatively uncomplicated retirement savings vehicles. A SEP allows employees to make contributions on a tax-favored basis to individual retirement accounts (IRAs) owned by the employees. SEPs are subject to minimal reporting and disclosure requirements. Under a SEP, an employee must set up an IRA to accept the employer’s contributions. Employers may no longer set up Salary Reduction SEPs. However, employers are permitted to establish SIMPLE IRA plans with salary reduction contributions. If an employer had a salary reduction SEP, the employer may continue to allow salary reduction contributions to the plan.
