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Flag of the United States.svg.png This article contains details specific to United States (US) investors. It does not apply to non-US investors.

A SEP is a simplified employee pension plan. A SEP plan provides employers with a simplified method to make contributions toward their employees’ retirement and, if self-employed, their own retirement. Contributions are made directly to an Individual Retirement Account or Annuity (IRA) set up for each employee (a SEP-IRA).[1] Employer contributions to a SEP-IRA are 100% vested to the employee and are not included in the employee's gross taxable income. According to ICI, SEPs (and their predecessor SARSEPs) held an estimated $390 billion dollars of assets as of 2016.[2][note 1]

Establishing an SEP

According to the IRS, there are three basic steps involved in setting up an SEP.

  • A formal written agreement must be executed. This written agreement may be satisfied by adopting an Internal Revenue Service (IRS) model SEP using Form 5305-SEP, Simplified Employee Pension - Individual Retirement Accounts Contribution Agreement. A prototype SEP that was approved by the IRS may also be used. Approved prototype SEPs are offered by banks, insurance companies, and other qualified financial institutions. Finally, an individually designed SEP may be adopted.
  • Each eligible employee must be given certain information about the SEP. If the SEP was established using the Form 5305-SEP, the information must include a copy of the Form 5305-SEP, its instructions, and the other information listed in the Form 5305-SEP instructions. If a prototype SEP or individually designed SEP was used, similar information must be provided.
  • A SEP-IRA must be set up for each eligible employee. SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. The SEP-IRA is owned and controlled by the employee and the employer sends the SEP contributions to the financial institution where the SEP-IRA is maintained.[3]

Eligible employees

Generally, any employee who performs services for a business must be included in a SEP. However, there are some exceptions to this general rule. Among the employees that may be excluded from a SEP are those who:

  • Have not worked for the company during three out of the last five years.
  • Have not reached age 21 during the year for which contributions are made.
  • Are employees who are covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees’ union and you.
  • Are nonresident alien employees who have received no U.S. source wages, salaries, or other personal services compensation from you.
  • Received less than $650 in compensation in 2021 or 2022, subject to cost-of-living adjustments in later years.[4]

A SEP cannot have a last-day-of-the-year employment requirement. Eligible employees must share in any SEP contribution. This includes eligible employees who die or quit working before the contribution is made.

Contributions for a year must be deposited by the due date (including extensions) for filing the business Federal income tax return for the year.[5]


Most SEPs, including the IRS model Form 5305-SEP, require that allocations to all employees' SEP-IRAs be proportional (the same percentage of salary/wages be contributed for all participants). Contributions are not required to be made every year, but in years contributions are made to the SEP, they must be made to the SEP-IRAs of all eligible employees. Whether a business owner is considered an employee of the business, or a self-employed proprietor, is dependent on the way the business is organized. If the business is organized as a S or C corporation, an incorporated partnership, or a Limited Liability Company (LLC) electing to be taxed as a corporation, the business owner is ordinarily paid a wage and is considered an employee of the company for tax purposes.[6]

Annual contributions an employer makes to an employee’s SEP-IRA cannot exceed the lesser of:

  1. 25% of compensation, or
  2. $61,000 for 2022, $66,000 for 2023, subject to annual cost-of-living adjustments for later years.

If the business is organized as an unincorporated business such as a sole proprietorship, unincorporated partnership or a LLC electing to be taxed as a sole proprietorship, the owner is considered, for tax purposes, to be self employed.[6] A self-employed owner’s SEP-IRA contribution is based on net profit minus one-half self-employment tax minus the SEP contribution for him or herself. See IRS Publication 560which includes the tables used for determining the owner's SEP-IRA contribution.[7]


Withdrawals from a SEP-IRA are taxable. Withdrawals prior to age 59 1/2 are subject to a 10% penalty tax. Required Minimum Distributions must begin by the age of 72 for retired individuals. If in any year the distributions from a SEP-IRA are less than the required minimum distribution for the year, you may have to pay the Tax on excess accumulations (insufficient distributions), a 50% excise tax for that year on the amount not distributed as required. The tax on excess accumulations is reported on Form 5329.[8]

Similar to Traditional IRAs, SEP-IRA's have the following exceptions to the early withdrawal penalty tax:

  1. A first-time home purchase (lifetime maximum is $10,000).
  2. Post-secondary education expenses.
  3. Substantially equal periodic payments taken under IRS guidelines.
  4. Medical expenses exceeding 7.5% of your adjusted gross income.
  5. An IRS levy on the SEP-IRA.
  6. Health insurance premiums (after you've received at least 12 consecutive weeks of unemployment compensation).
  7. Disability.
  8. Death.[9]

Details on these exceptions can be found in IRS Publication 590.


You may rollover your SEP-IRA into a number of tax-deferred accounts. Retirement plan assets can be rolled over into an SEP-IRA:[10]

SEP-IRA rollovers
Permitted rollover from SEP into eligible plans Permitted rollover from eligible plans into an SEP-IRA

Competitive alternatives

Employers with businesses that have employees should compare an SEP with a SIMPLE IRA. Self-employed individuals should compare an SEP with a Solo 401k plan. The Vanguard tool, Which retirement plan is right for you?, can provide guidance for plan selection.


  1. SEP-IRA assets 1997 - 2016 (in billions).
    Source: Investment Company Institute. 2017. "The U.S. Retirement Market, Second Quarter 2017" (September).
    Year Assets Share
    1997 $85 5%
    1998 $115 5%
    1999 $143 5%
    2000 $134 5%
    2001 $131 5%
    2002 $117 5%
    2003 $145ᵉ 5%
    2004 $169 5%
    2005 $193 6%
    2006 $236 6%
    2007 $266 6%
    2008 $201 5%
    2009 $247 6%
    2010 $265 5%
    2011 $266 5%
    2012 $298 5%
    2013 $349 5%
    2014 $367 5%
    2015 $370ᵉ 5%
    2016 $390ᵉ 5%
    • Share is the percentage of total IRA assets.
    • ᵉ Data are estimated.

    Sources: Investment Company Institute, Internal Revenue Service Statistics of Income Division, and Government Accountability Office

See also


External links