This rewrite explains what a Simplified Employee Pension (SEP) plan is, how it works, and who may benefit from it. It also updates the content for taxpayers looking for retirement plan information during the 2026 tax year.
What Is a Simplified Employee Pension (SEP) Plan?
A Simplified Employee Pension (SEP) plan is a retirement plan that allows employers to make contributions to traditional IRAs set up for eligible employees. These accounts are known as SEP-IRAs.
SEP plans are popular with small businesses and self-employed individuals because they're easy to establish, simple to maintain, and generally have lower administrative costs than many traditional retirement plans.
With a SEP, only the employer makes contributions. Employees do not contribute to the SEP account through payroll deductions. Employer contributions can be substantial, with annual contribution limits generally based on a percentage of the employee's compensation and subject to IRS limits.
Why Choose a SEP Plan?
A SEP offers several advantages for business owners:
- Easy to set up and administer
- Lower start-up and maintenance costs than many other retirement plans
- Flexible annual contributions that can vary from year to year
- Available to businesses of any size, including sole proprietors and self-employed individuals
One important rule to keep in mind: employers must generally contribute the same percentage of compensation for all eligible employees.
Who Can Have a SEP Plan?
Any business can establish a SEP plan, including:
- Sole proprietorships
- Partnerships
- Corporations
- Limited liability companies (LLCs)
- Self-employed individuals
If you're an employee, your employer may establish a SEP-IRA on your behalf if you meet the plan's eligibility requirements.
How Do I Establish a SEP?
If you're self-employed or own a business and would like to set up a SEP plan, the IRS provides guidance on establishing and maintaining a SEP.
You'll typically need to:
- Adopt a written SEP agreement.
- Provide eligible employees with information about the plan.
- Open a SEP-IRA for each eligible employee who participates.
For additional details and current IRS requirements, visit the IRS SEP Plan resource page.
Related Tax Tip
A SEP contribution may help reduce taxable income while building retirement savings. If you're self-employed, a SEP can be a valuable retirement planning tool because contribution limits are often higher than those available with a traditional IRA alone.
Additional Information
- How much can I contribute to an SEP?
- Can I rollover funds into or out of my SEP retirement account?
- Who can participate in a SEP plan?