May 3, 2016

Simplified Employee Pension Plans: SEP Eligibility and Setup

Many have heard of Simplified Employee Pension plans, or only know that SEP’s are a type of retirement vehicle. However, do we all really understand Simplified Employee Pension plans and how they work?

Part One of the two-part series will bring some clarity to the subject and give a breakdown of eligibility requirements.


SEP plans are a tool many individuals use to save for retirement. Employers can setup and make tax-deductible contributions at their discretion. Any employer including sole proprietors, partnerships, corporations, and nonprofit organizations may setup a SEP plan. SEP plans are simple to implement and can be started at a lower cost than most other retirement plans. The discretionary contributions give the employer the freedom to make contributions in profitable years and refrain in other years.


SEP plans have certain employee eligibility requirements that include the following:

  • 21 years old
  • At least $550 per year in earnings
  • Employee has worked for the company in 3 of the last 5 years

All eligible employees are required to participate in the plan. Some employers may choose to make the eligibility requirements even less stringent if they so choose (Ex. Lowering the minimum age to 20).


SEP plans can be setup rather quickly.  The following steps show a simplified guideline of how to get the plan started.

  • Contact a retirement plan professional to have them help draft the SEP model and then act as the trustee
  • Execute a written agreement laying out the plan terms and guidelines
  • Provide employees with the agreement and detail on the plan’s eligibility requirements with language that states:
    • Different rates of return compared to other IRA’s are possible
    • Amendments will be announced 30 days prior to implementation
  • Employee will receive details on YTD employer contributions and account value by the following January 31st
  • Ensure that all eligible employees have established a SEP and are to receive any eligible contributions
  • Make Contributions by due date of the entities tax return (including extended deadlines)

Many plans follow the IRS provided guidelines on the model SEP Form 5035-SEP which can be modified to fit varying needs. The IRS website provided a template on their webpage.

Please look forward to Part 2, which will delve into how to make plan contributions and distributions.  As always, if you have additional questions, we at Anders are always willing to assist you with your financial planning needs. Contact an Anders advisor.

All Insights

Keep up with Anders

Want to keep up with all the latest insights from Anders? Subscribe and receive the information that matters to you.