Simplified Employee Pension Plans

The SEP IRA offers employers a simple process to set up retirement savings accounts and make contributions for their employees. Employers adopt a written SEP plan agreement, choose an Internal Revenue Service-approved plan, provide required information to participants and set up SEP IRA accounts for each participating employee at a bank or other financial institution.

The Salary Reduction Simplified Employee Pension Plan, or SARSEP, refers to certain SEP accounts set up prior to 1997 that allow employees to contribute to their accounts. Although the IRS prohibited the establishment of SARSEPs after 1996, the agency as of publication continues to allow tax-advantage status for existing SARSEPs.


Simplicity and Cost

Although the IRS markets the SEP IRA as a good choice for small businesses, any size business may establish a SEP. A business may design its own SEP IRA or use the prototype plan available with IRS Form 5305-SEP. Financial institutions also have model SEP IRA plans employers can use. The SEP IRA has lower costs for startup and operation than traditional retirement plans. Unlike with traditional retirement plans, employers don’t have an annual filing requirement with the SEP IRA.


Eligibility and Employer Contributions

An employer can make the SEP IRA available to employees and can also establish an account for themselves. Partners in limited liability companies can have SEP IRAs. Employers may contribute up to 25 percent of an employee’s pay to a SEP IRA account, but only the employer is allowed to make contributions. Employees are not eligible for a SEP IRA until they have worked at least three of the past five years for the company. However, this rule is balanced by the prohibition against the “last-day-of-the-year employment requirement” that would prevent an eligible employee from receiving a share of SEP IRA contributions made to accounts after he dies or leaves the company.



Employees are immediately and continuously 100 percent vested in all of the funds in their SEP IRA accounts. Under certain circumstances, employees can make non-SEP contributions, including catch-up contributions for participants 50 years of age and older, to the IRA that holds the SEP contributions if the SEP IRA plan document allows. The traditional IRA rules for loans, distributions and investments apply to the SEP IRA – Loans are not allowed with the SEP IRA. Employer contributions to SEP IRA accounts are not included in employees’ gross income, unless there are excess contributions, or on employees’ W-2 forms.


Contribution Limits

Refer to the Annual Limits page for information on contribution limits.


Combinations Allowed

The IRS allows you to combine money in a SEP IRA with money in a 401(k) plan. Since both accounts offer pre-tax savings, you won’t pay any taxes when you move the money. However, the IRS doesn’t require that SEP IRAs or 401(k)s accept rollovers from other plans, so it’s possible that even though the IRS permits it, your employer plan will not accept the rollover.