3 Proven Reasons a Small Business Should Consider a SEP Retirement Plan

A Simplified Employee Pension (SEP) is an employer sponsored retirement plan.


Here are 3 proven reasons to consider this plan.


 1) Very Little Paperwork

Unlike other retirement plans like a profit-sharing or 401(k) plan, there is very little paperwork involved.  With a profit-sharing or 401(k) plan there is various testing that needs to be done and forms filed with the IRS. A Form 5500, Annual Return/ Report of Employee Benefit Plan needs to be filed annually.  With these plans you will need a Third Party Administrator (TPA) to help you with the testing and the tax filings.  This increases the costs to the plan and adds complexity.  Eith a SEP the employer merely needs to complete Form 5305-SEP, Simplified Employee Pension – Individual Retirement Accounts Agreement, and keep it on file. With a SEP, as its name implies, it truly is simplified.


2) Funding Flexibility

With a SEP the employer can contribute up to 25% of compensation annually not to exceed $51,000 per employee in 2013.  Compensation is generally what is reported on your W-2 as wages. This allows the employer with flexibility depending on how well the business is doing. When times are good they can contribute more.  If things slow down they can contribute less. Small business owners like this feature about the plan as there is no automatic annual commitment to fund the retirement plan.


3) Adopt the Plan Any Time

The SEP can be adopted any time prior to filing a return including extensions. A profit-sharing or 401(k) plan must be adopted in the year it is to take affect. So if you are looking for a last minute tax deduction, consider a SEP.



There are a few tradeoffs with the SEP.  Eligible employees are ones that have worked 3 of the preceding 5 years. There is no hour of service test however. With a profit-sharing or 401(k) plan employers can exclude employees that don’t work more than 1,000 hours. Essentially this means that part-time employees are not eligible to participate in these plans. This isn’t the case with a SEP.  With a SEP, employees that meet the years of service requirement above and are at least age 21 eligible if they earn more than $550 a year.

Additionally with a profit-sharing plan there may be a vesting period involved.  For example if the vesting period was 5 years, the employee would vest (‘earn’) 20% per year. There is no vesting period with a SEP.  Once the SEP has been funded, it’s immediately 100% vested.

Small Business Owners will you consider a SEP Retirement Plan?

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Tom Scanlon has over thirty years experience in public accounting with an extensive background in the areas of financial, tax, and estate planning. He prides himself on providing in-depth and customized solutions to privately held businesses and their owners. He is a Certified Public Accountant and Certified Financial Planner®. Tom is a frequent speaker for area organizations and has  recently been quoted on CNBC, Fox 61 News and AARP's blog. Tom also has been a guest columnist for numerous publications including The Wall Street Journal, Barron's, Money Magazine, The Hartford Courant, The Hartford Business Journal, and The New Haven Register. He is a member of the American Institute of Certified Public Accountants, the Connecticut Society of Certified Public Accountants, and the Financial Planning Association. Active in the community, Tom supports a variety of not-for-profit organizations.

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  1. […] SEP or simplified employee retirement plan is a great option for small business, says the Borgida & Company Blog.  Top reasons to consider the plan include the benefit of limited paperwork, funding flexibility, […]