Advantages of a SEP IRA Plan

Easy setup

A business owner can set up a SEP IRA plan using internal Revenue Service (IRS) Form 5305-SEP. The cmpleted form becomes the SEP IRa plan’s basic legal document and helps to ensure the plan is in compliance.

Cost Efficient

Administrative costs related to a SEP IRA plajn are generally low because there are no complex compliance testing requirements and there is limited government reporting.

Longer eligibility requirements

A SEP IRA plan imposes relatively long service requirements in comparison to other types of plans. This allows employers to exclude certain employees which may, in turn, help control costs.


Discretionary Contributions

Employers are not required to make contributions every year. When contributions are made, however, they must be allocated to all eligible employees’ IRSs according to the SEP IRA agreement. Employers may discontinue the plan at any time.

Limited Fiduciary Responsibility

Employer contributions are sent to the financial institutions where the eligible employees have set up IRAs. Investment decisions are the responsibility of each employee which helps limitr the fiduciary responsibility of the employer.

SEP IRA Plan Participation

There are three basic requirements:


Any type of business can establish a SEP IRA plan, including
sole proprietorships, corporations (including S corporations),
and nonprofit organizations. All eligible employees of a
business with a SEP IRA plan must participate. An eligible
employee is an individual who meets the following


• Age 21 or older.
• Worked for the company during three of the last five years.
• Received at least $6001 in compensation from the company
for the year.


An employer may use less restrictive eligibility requirements,
but not more restrictive, than what is shown above.

Establishing a SEP IRA plan

There are three basic steps:



Execute a formal written agreement.

A SEP IRA plan is adopted when a business creates a written agreement authorizing it and eligible employees are informed. The IRS’s model agreement Form 5305-SEP may be used. Other SEP IRA forms are available through financial instituations.


Give all eligible employees information about the plan.

Information about the plan must be provided to each eligible employee. Sample forms and communications are available from financial instituations.


Make sure a SEP IRA is set up for each eligible employee.

A SEP IRA must be set up for each eligible employee. If an eligible employee does not set up a SEP IRA, the employer is required to set it up on his or her behalf. Each SEP IRA is individually owned and controlled.