What Is a SEP Account?

Simplified Employee Pension (SEP) Account DefinitionSimplified Employee Pension (SEP) Account Definition

Key Takeaways

  • A SEP allows employers to contribute to retirement accounts for themselves and employees. Only the employer contributes, not the employees.
  • Employers can contribute up to 25% of an employee's salary, up to $69,000 in 2024. Contribution percentages must be uniform for all eligible employees.
  • SEPs have no setup fees or annual paperwork. Contributions are tax-deductible for the employer.
  • Employees are 100% vested immediately. However, SEPs don't allow loans, catch-up contributions, or employee contributions.
  • SEPs can be a good fit for businesses of any structure and number of employees. However, they lack some benefits other plans provide, so business owners should evaluate their needs.

If you run a small or midsize business, you might want to offer employees some of the benefits they would expect from a larger company. Not only does this show employees that you care about them and their future, but it could allow you to better compete for, and retain, high-quality talent.

One common employee benefit is a retirement plan. Even if a full 401(k) package isn't the right fit for your business, a simplified employee pension (SEP) plan might provide a more affordable, manageable benefit for your valued workers.Learn more what a SEP account is, its benefits and if a SEP account is right for you.

Understanding a SEP Account

A SEP — or SEP individual retirement account (IRA) — is a plan that allows an employer to contribute money each year to retirement accounts for the business owner and employees.

They function similarly to IRAs, but a key difference between a SEP and some other retirement plans is that only the employer contributes to a SEP. The employee can still put some of their income toward a traditional or Roth IRA they've opened separately, allowing them to leverage different tax advantages for themselves.

Advantages of a SEP Retirement Account

A SEP may provide benefits for business owners and employees. For one, unlike a similar savings incentive match plan for employees (SIMPLE) IRA, a business with any number of employees can open a SEP. They're also allowed for any business structure, whether it's a sole proprietor, partnership, corporation or other.

Business owners can contribute an amount equaling up to 25 percent of an employee's salary, subject to a maximum contribution of $69,000 in 2024, according to the Internal Revenue Service (IRS).2 The percentage or amount the employer contributes doesn't have to be the same each year. That helps make the plan more flexible for businesses with fluctuating incomes. The maximum annual contribution is also subject to change from year to year.

Some retirement plans require fees and ongoing paperwork to maintain. The SEP retirement account does not require the owner to file annual paperwork, and there are no setup or maintenance fees for the plan. The contributions are also a tax-deductible business expense for the employer.

Employees are also 100 percent vested when the first contribution is made. That is an advantage for employees, who know they will have access to the full retirement amount in their plan if they choose to leave the company.

Conditions of a SEP Retirement Account

Different retirement plans will make better fits for different businesses, so it's important to consider the caveats of a SEP IRA before selecting one.

  • Uniform contribution percentage: One important condition is that annual contribution percentages must be the same for all eligible employees. That means if you, as the business owner, want to maximize SEP contributions to your personal account, and contribute the full 25 percent of your salary, you must also contribute 25 percent of each eligible employee's salary.
  • No employee contribution: Remember, only the employer can contribute to a SEP. A 401(k) plan would otherwise allow employees to contribute tax-deductible income to their retirement plans. The employee can still fund an IRA, though the annual maximum is lower than a 401(k). In this way, a SEP could potentially restrict individual employees' personal retirement funding.
  • No vesting requirements: Although many employees will be happy about the instant 100 percent vestment, this does not always provide an incentive for employees to stick with your company. Some companies prefer to use vesting to retain loyal employees, which is not an option on a SEP account.
  • Eligibility requirements: An employee must be at least 21 to participate in a SEP, and needs to have worked for the employer for at least three of the last five years. The employee must have received at least $750 in compensation during the year as well. This may exclude a portion of your workforce from SEP benefits if much of your staff is young or performing seasonal part-time work.
  • No loans or catch-up contributions: Some retirement plans allow personal loans to the account owner (often for a fee) or catch-up contributions for workers age 50 and older. The catch-up funds help people who are closer to retirement age to increase their retirement savings. SEP plans do not allow either of these benefits.

Is a SEP Right for You?

A retirement account can be an important part of an employee benefits package. Business owners should consider what elements of a retirement plan are most important to them, and which plans best fit their company's model. Talking to a financial representative may be a good way to evaluate your own retirement funding needs, and help determine how your business may be able to help your employees with their retirement planning as well.

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  1. Simplified Employee Pension Plan (SEP). https://www.irs.gov/retirement-plans/plan-sponsor/simplified-employee-pension-plan-sep.
  2. COLA increases for dollar limitations on benefits and contributions. https://www.irs.gov/retirement-plans/cola-increases-for-dollar-limitations-on-benefits-and-contributions.

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