Simplified Employee Pensions (SEPs)

A simplified employee pension (SEP) is a type of individual retirement account (IRA) that an employer or self-employed person can establish. Contributions are primarily made by the employer on a discretionary basis and are tax deductible. Contribution limits with these types of retirement accounts are typically higher than that of standard IRAs and 401ks. As of 2022, contributions made by employers cannot exceed 25% of an employee’s annual compensation or $61,000.

SEP IRAs do not have the start-up and operating costs that are associated with most other employer-sponsored retirement plans and employers are not required to make annual contributions if their business cash flow is a problem.

SEP IRAs are like any other IRA in terms of investment, transfer and rollover rules, but not every business can offer them. SEP IRAs were designed to incentivize businesses to offer retirement benefits that would not otherwise offer employer-sponsored plans. Sole proprietors, partnerships and corporations are eligible. Unlike traditional pensions, SEP plans are fully vested at the time of the contribution.