Simplified Employee Pension (SEP-IRA) Plans

What Is a SEP-IRA?

A Simplified Employee Pension Individual Retirement Arrangement (SEP-IRA) — often called simply a “SEP” — is an easy and cost-effective retirement plan option for small business owners, self-employed individuals, and employers who want to contribute to their own retirement and that of their employees.

It works similarly to a Traditional IRA, but with much higher contribution limits and more flexibility. Contributions made to a SEP-IRA are tax-deductible, and investment earnings grow tax-deferred until withdrawn.

Why Choose Z Tax & Accounting?

At Z Tax & Accounting, we specialize in helping small business owners nationwide establish and manage SIMPLE 401(k) and SEP-IRA plans.

Our team handles:

• Plan setup and compliance
  
  

• Employer contribution strategies
  
  

• IRS and DOL filing requirements
  
  

• Employee eligibility and communication
  
  

• Tax reporting and year-end documentation
  
  

We make the process simple, efficient, and fully compliant — so you can focus on growing your business while building financial security for yourself and your employees.  Contact us Today !

Setting Up a SEP-IRA:

• Deadline: Employers have until their business tax filing deadline (including extensions) to set up a SEP plan and make contributions for that year.
  
  

• No complex plan documents: Unlike 401(k)s or other qualified retirement plans, SEPs don’t require a formal plan document.
  
  

• Written agreement required: Employers must have a written agreement to provide benefits to all eligible employees. This can be done easily using IRS Form 5305-SEP.
  
  

• Simplified filing: When using Form 5305-SEP, employers typically do not have to file annual reports with the IRS or Department of Labor.
  
  

How Contributions Work:

• Employer-funded: Only the employer contributes to a SEP-IRA. Employees cannot make their own contributions.
  
  

• Flexibility: Employers can decide how much to contribute each year — including choosing not to contribute in some years.
  
  

• Equal treatment: If the employer contributes, the same percentage of compensation must be contributed for all eligible employees.
  
  

• Contribution limits:
  
  

  • Up to 25% of an employee’s compensation, or
    
    

  • A maximum of $69,000 for 2024 (whichever is less).
    
    

  • Contributions must be made in cash — not property or other assets.
    
    

  • No salary deferrals or catch-up contributions are allowed.
    
    

Eligibility Rules:

To be an eligible employee under a SEP-IRA, an individual must:

1. Be at least 21 years old.
   
   

2. Have worked for the employer in at least 3 of the last 5 years.
   
   

3. Have received at least $750 in compensation from the employer in 2024 and 2025.
   
   

Employers can use less restrictive participation rules (for example, lowering the age requirement to 18), but not more restrictive ones.

Excludable employees include:

• Workers covered under a union (collective bargaining) agreement.
  
  

• Nonresident aliens with no U.S.-sourced income.
  
  

Ownership, Vesting, and Control:

• All contributions are immediately 100% vested, meaning the employee fully owns the funds as soon as they are deposited.
  
  

• Employees have complete control over their SEP-IRAs — employers cannot restrict withdrawals or loans.
  
  

• Withdrawals can be made anytime, but:
  
  

  • They are taxable as income in the year withdrawn (unless rolled over).
    
    

  • Early withdrawals (before age 59½) are generally subject to a 10% penalty, unless an exception applies.
    
    

  • SEP-IRAs cannot issue loans.
    
    

  • Withdrawals can be rolled over tax-free to another SEP-IRA, Traditional IRA, or another qualified plan.
    
    

SEP-IRA and Taxes:

• Employer contributions are tax-deductible for the business.
  
  

• Employees don’t pay tax on contributions until they withdraw the money.
  
  

• Earnings grow tax-deferred, similar to Traditional IRAs.
  
  

• SEP contributions are not reported on an employee’s Form W-2.
  
  

• Employees can still contribute to a Traditional or Roth IRA separately — SEP contributions do not affect IRA limits.
  
  

Roth SEP-IRA Option (Secure 2.0 Act):

Under the Secure 2.0 Act, employers can now allow Roth contributions in SEP and SIMPLE IRAs:

• These contributions are made after-tax (not deductible).
  
  

• Withdrawals are tax-free if Roth rules are met.
  
  

• Employer Roth contributions are reported on Form 1099-R and are taxable to the employee in the year made.
  
  

Additional Details:

• A SEP-IRA can be set up for a self-employed person, even if they participate in another employer’s retirement plan.
  
  

• Household employers can also create SEPs — for example, to contribute on behalf of a nanny or chauffeur.
  
  

• No annual filing is required for most SEPs, which keeps administrative costs low.
  
  

• Required Minimum Distributions (RMDs) must begin once participants reach the mandatory age (currently 73 under SECURE 2.0).
  
  

• Transfers or rollovers from other qualified plans to a SEP-IRA are permitted.
  
  

Key Takeaways:

• SEP-IRAs are simple, flexible, and affordable retirement plans.
  
  

• They’re ideal for small businesses and self-employed individuals.
  
  

• Employers can decide each year how much to contribute.
  
  

• All contributions are tax-deductible, and employees’ accounts belong entirely to them.
  
  

• With the addition of Roth SEP options, employers and employees now have even more flexibility in how they save for retirement.

Simplified Employee Pension (SEP-IRA) Plans          SIMPLE IRA Plans          SIMPLE 401(k) Plans          Defined Contribution Plans          Defined Benefit Plans