When Does SEP Have to Be Established?

What is a SEP?

A Simplified Employee Plan, otherwise known as a SEP, is a basic retirement plan that small employers can establish in order to offer its employees retirement benefits. These plans are very basic retirement plans that utilize IRAs as a vehicle for employer contributions to retirement. All employees who have attained age 21 and has worked with the employer for three of the preceding five years and has earned at least $550 in compensation shall be an eligible employee for the SEP. The employee is in charge of investment decisions for his or her account in the SEP.

Once an employer has established its SEP for employees, it must provide those employees certain notifications. The employer must give notice that a SEP has been established along with the requirements that must be met in order to receive an allocation under the plan and the basis on which the employer contribution will be allocated to each employee under the plan. In order for the plan to be considered adopted, the employer must also provide each employee a copy of the plan document. If the employer is using the IRS's model SEP plan document, the employer must give the employees a statement that IRAs other than the one to which the employer contributes may have different rates of return, the administrator will provide amendments and an explanation of such to employees within 30 days of being effective and the employer will give written notice to the participant of employer contributions made to the employee's account by January 31 of the subsequent year.

Once the SEP has been established and the plan is deemed to be adopted, a SEP-IRA must be set up for each eligible employee. A SEP-IRA can be established at a bank, insurance company or similar financial institution. SEP contributions are required to go to traditional IRAs, rather than Roth IRAs. Employers are required to establish the SEP-IRAs for each eligible employee for the year by the time the employer's business income tax return for the year is due, including extensions, for the year in which the employer wishes to establish the SEP.

Though employers are not required to contribute to their employees' SEPs each year, employers are limited in the amount of contributions that they can make in the years in which they decide to make contributions. An employer may base contributions on the first $245,000 of each eligible employee's compensation and may make contributions in the same percentage for every employee. The maximum contribution that an employer may make is the lesser of $49,000 or 25 percent of the employee's annual compensation. Employer contributions are due by the due date, including extensions, for the employer's business income tax return for the year.