Consultant’s Corner: Establishing a Simplified Employee Pension Plan

Question: What is required when establishing a SEP Plan?

A Simplified Employee Pension (SEP) Plan, also referred to as a SEP-IRA, is one of the easiest small business retirement plans to set up and maintain. You can make sizable contributions for yourself and any eligible employees. There’s little administration, any employer—including self-employed individuals—can establish a SEP, a separate tax filing for the plan isn’t required, and you can vary contributions from year to year—or even skip a year. As discussed in the following U.S. Department of Labor and IRS information, there are three basic steps to establishing a SEP:

Step 1

Contact a retirement plan professional or a representative of a financial institution that offers retirement plans and choose the IRS model SEP, Form 5305-SEP, Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement, or another plan document offered by the financial institution. Regardless of the SEP document you choose, when filled in, it will include the name of the employer, the requirements for employee participation, the signature of a responsible official, and a written allocation formula for the employer’s contribution.

A SEP may be established as late as the due date (including extensions) of the company’s income tax return for the year you want to establish the plan.

Choosing a financial institution for your SEP is one of the most important decisions you will make, since that entity becomes a trustee to the plan. Trustees work closely with employers and agree to:

• Receive and invest contributions.
• Provide each participant with a notice of employer contributions made each year and the value of his/her SEP-IRA at the end of the year.

Trustees of SEP-IRAs are generally banks, mutual funds, insurance companies that issue annuity contracts, and certain other financial institutions that have been approved by the IRS.

Step 2

Complete and sign Form 5305-SEP (or other plan document, if not using the IRS model form). When it is completed and signed, this form becomes the plan’s basic legal document, describing your employees’ rights and benefits. Do not send it to the IRS; instead, use it as a reference since it sets out the plan’s terms (e.g., eligible employees, compensation, and employer contributions).

Step 3

Give your employees a copy of the Form 5305-SEP (or other plan document, if not using the IRS model form) and its instructions, along with certain information about SEP-IRAs. The model SEP is not considered adopted until each employee is provided with a written statement explaining that:

1. A SEP-IRA may provide different rates of return and contain different terms than other IRAs the employee may have.
2. The administrator of the SEP will provide a copy of any amendment within 30 days of the effective date, along with a written explanation of its effects.
3. Participating employees will receive a written report of employer contributions made to SEP-IRAs by January 31 of the following year.

For more information on establishing a SEP, review these articles:

SEP Plan FAQs | IRS.gov

Simplified Employee Pension Plan (SEP) | IRS.gov

Publication 560, Retirement Plans for Small Business (See chapter 2, Simplified Employee Pension (SEP)) | IRS.gov