What is a Simplified Employee Pension (SEP)?

A simplified employee pension (SEP) is an individual retirement account or annuity that is allowed to receive an increased rate of contributions from the IRA holder's employer. SEPs are subject to special requirements regarding participation, discrimination, withdrawals, and an employer allocation formula.

Any employer, whether it is a corporation, a partnership, or even a one-person sole-proprietorship with no other employees, may establish a SEP. Because the employer is not required to establish a trust, as with other retirement plans, it is relieved of several of the fiduciary and administrative responsibilities associated with those plans. SEPs may be excluded from filing annual return/reports (Form 5500 series) and from furnishing summary annual reports or summary plan descriptions to participants and beneficiaries.

Contributions to a SEP on behalf of an employee are limited to the lesser of 25 percent of the employee's compensation (up to the compensation limit) or the defined contribution plan dollar limit (see ¶47,440 for current figure). The amounts contributed to a SEP by an employer on behalf of an employee are excludable from the employee's gross income.