Simplified Employee Pension (SEP) IRAs Contributions

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interest include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency, Web 3.0, and metaverse ecosystems.

Simplified Employee Pension (SEP): (source: retirementliving.com)

A Simplified Employee Pension (SEP) is a voluntary retirement plan that an employer can establish for employees and also for themselves. Each year, an employer can decide whether it wishes to make an annual contribution to each qualified employee through this retirement plan. These funds must be deposited into a traditional Individual Retirement Account or Annuity (IRA). The employee is then free to decide how these employer contributions should be allocated within their IRA. It is a “simplified” retirement plan since the employer (typically self-employed individuals) is not required to submit any type of form or paperwork to the IRS. In contributing to this plan, the employer must adhere to certain rules and requirements as spelled out in IRS form 5305-SEP, the contents of which are discussed below. In addition, some of the more important rules and regulations are summarized. These voluntary employer-sponsored retirement plans are also compared to other self-funded retirement plans, like traditional IRAs.

What are SEP IRA Rules?

Contribution eligibility and limits There are certain contribution limits that employers must adhere to when funding a SEP IRA. For example, in 2022, contributions for each eligible employee must be based only on the first $305,000 of compensation. Earlier years had lower contribution limits. In addition, the employer’s contribution must be the same percentage of compensation for each qualified employee. This SEP IRA contribution must be paid directly into the employee’s SEP-IRA. For 2022, contributions are limited annually to the smaller of $61,000 or 25% of the employee’s compensation. If the employer establishes a SEP, all eligible employees must be allowed to participate. An eligible employee is an individual (including a self-employed individual) who meets all of the following requirements: • Employee must be at least 21 years of age • Employee has been employed by the employer initiating the SEP plan in at least 3 of the last 5 years • During 2022, the employee has received at least $650 in compensation from the contributing employer These are merely the most restrictive eligibility requirements that an employer can establish. Therefore, the employer can establish less restrictive eligibility requirements if they so choose. For example, an employer may set the minimum age requirement to 19 or may decide that an employee only needs to have been employed with the employer for 2 of the last 5 years.

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