Simplified Employee Pension (SEP) IRA

Definition

An IRA based retirement plan established by an employer (business) for its employees. Under a SEP IRA, the employer makes SEP contributions to Traditional IRAs established y and for eligible employees.

Some financial institutions require that the traditional IRA be flagged/identified as a SEP IRA in order for SEP employer contributions to be made to the account.

Earnings on SEP IRA assets accrue on a tax-deferred basis and distribution amounts are treated as ordinary income.

Once SEP contributions are made to the IRA, they take on the characteristic of traditional IRA assets, including being 100% vested.

Employers are eligible to deduct contributions they make to their employees accounts, up to the limits that are in effect for the year.

Employer may exclude the following employees:

• Certain nonresident aliens
• Employees  under age 21
• Employees who have performed less than three years of service during the previous five years
• Employees covered under a collective bargaining agreement
• Employees with compensation of less than $500

Referring Cite

IRC § 408(k), IRS Publication 560

Additional Helpful Information

• An employer may contribute the lesser of 25% of compensation or the dollar limit that is in effect for the year.

• For unincorporated business owners, their percentage is 20% of their modified net profit. The dollar limits in effect are as follows:

• Required minimum distributions (RMD)s  must begin by April 1 of the year following the year the employee attains age 70 ½  
• Distributions that occur before the participant reaches age 59 ½ are subject to a 10% early distribution penalty, unless an exception applies