What is a SEP plan?
- A SEP plan is an IRA-based retirement plan designed for self-employed individuals and small-business owners that offers high contribution limits, low administrative costs and potential tax advantages.
- Only employers can contribute to a SEP plan, and the same contribution percentage must be applied to all eligible employees.
- SEP plans are generally considered simple to set up and maintain, which may make them an attractive option for some small businesses.
Byline: Suzanne Murphy, Executive Director, Wealth Management Solutions
Planning for retirement can be challenging for small-business owners and self-employed individuals. Many entrepreneurs who are seeking a flexible and tax-efficient retirement plan but lack access to traditional employer-sponsored plans like 401(k)s can choose a SEP, or Simplified Employee Pension plan, to meet their needs.
Created through the Revenue Act of 1978, SEPs are designed to simplify the retirement planning process by allowing business owners to contribute to their employees’, as well as their own, retirement savings while minimizing the administrative costs of maintaining and operating the plan. This article will explore how SEPs work, the pros and cons of these retirement accounts and how they stack up against other retirement plan options.
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Understanding SEPs
A SEP is a retirement plan designed for self-employed individuals and small-business owners. It shares many similarities with a traditional IRA but offers the advantage of higher contribution limits and is funded solely by the employer. As a tax-advantaged retirement account, it provides a convenient and cost-effective way for small-business owners and freelancers to save for their future. SEP plans may offer flexibility and ease due to their simple setup and fewer administrative requirements compared to some other retirement plan options, SEP plans offer flexibility and ease. While SEP plans have their own nondiscriminatory requirements, employers managing a SEP plan benefit from not having to undergo complex testing required for some other retirement plans.
The table below provides a breakdown of how SEP plans compare to other popular plans.
SEP | 401(k) |
|---|---|
Who can contribute | |
Employer | Employee and employer |
Contribution limits (2025) | |
Up to 25% of compensation (max $70,000 in 2025) | $23,500 employee deferral ($31,000 for those 50 and older, $34,750 for those aged 60-63); up to $70,000 total with employer match |
Tax treatment | |
Tax-deductible contributions for employer | Tax deductible contributions for employer and salary deferral (pre and post-tax) for employees |
Withdrawals | |
Taxed as ordinary income | Taxed as ordinary income (unless Roth 401(k), in which case all qualified distributions are tax exempt) |
Eligibility criteria for SEPs
Any business owner – including sole proprietors, partnerships, freelancers and gig workers with 1099 income – is eligible to open a SEP. This plan type may be particularly attractive for companies or businesses that do not have employees. If your business has employees, the IRS requires that employees who are at least 21 years old, have worked for you in three of the past five years and earn at least $750 in compensation for the year be eligible for plan contribution. However, you can choose to expand eligibility if you’d like.
SEP contribution limits
Employers are generally able to contribute up to 25% of compensation, up to $70,000 in 2025. The IRS limits the compensation that can be considered for contributions to $350,000 in 2025. These contribution limits will increase to $72,000 and $360,000, respectively, in 2026..Self-employed individuals are typically able to contribute about 20% of net earnings after deducting self-employment tax, but it’s a good idea to speak with a tax professional to determine the exact number. However, unlike 401(k) plans, there is no additional age-based catch-up contribution amount for SEPs.
Contributions to a SEP are tax deductible, helping to reduce taxable income for the business. Investment growth (if any) is generally tax deferred and will only be taxed when withdrawn. Because a SEP is a retirement account, the tax consequences will typically depend on your age as well as the circumstances and use of the distribution. Additionally, employers are not required to contribute annually. Contributions are entirely discretionary and are typically based on the employer’s financial situation in each given year. If an employer does contribute, all contributions must be proportional, or the same percentage of compensation for each eligible employee.
Pros and cons of SEPs
Benefits of SEPs
- High contribution limits may help in building savings more quickly.
- Employer contributions to employee accounts may be tax deductible to the business owner.
- Generally easy to set up and maintain – no annual employer IRS filings required.
- Flexible contributions – no required annual contribution.
Downsides of SEPs
- Owners who contribute for themselves must contribute the same percentage of income for each eligible employee.
- SEPs are not eligible for catch-up contributions like 401(k)s and other plans.
- Employees can’t make their own contributions.
Setting up and managing a SEP
Setting up a SEP is relatively simple compared to most other retirement plans. Here’s a quick guide to getting started:
- Choose a provider: Select a bank, brokerage or online investment platform that offers SEPs. Consider fees, investment options and ease of use.
- Adopt a SEP plan written agreement: The IRS offers model Form 5305-SEP to officially create the plan. Also, financial institutions may provide an IRS-approved SEP agreement. This form outlines the plan rules and is kept for your records – there is no need to file it with the IRS.
- Notify eligible employees: Provide written notice to all eligible employees, including a copy of the written agreement and any plan details.
- Open IRA accounts: You and each eligible employee must open a SEP IRA. Employees are responsible for making the investment decisions for their account.
- Decide on annual contributions: Contributions are flexible. You can decide each year how much to contribute, but if you contribute, it must be the same percentage of compensation for each eligible employee.
- Meet deadlines: Contributions are due by your tax filing deadline, including extensions.
The relative ease of this process may make a SEP a practical and lower-maintenance retirement solution for some self-employed individuals and small-business owners.
The bottom line
SEPs are considered by some to be an effective and user-friendly retirement savings option for self-employed people, including freelancers, gig workers, and small-business owners. They can also be a great option if your business income varies from year to year, or if you simply want to avoid the administrative headaches that come with many other types of retirement plans.
With a SEP, you may benefit from tax savings, relatively high contribution limits, and flexibility in a plan that is generally considered easy to administer. A SEP may help as a tool for investment and savings while generating tax-deferred growth on that income to use in retirement. You may consider consulting a tax advisor to understand specific tax implications and whether a SEP is right for you.
Frequently asked questions about SEPs
Absolutely. In fact, these plans are designed for self-employed people. Anyone who has self-employment or 1099 income can establish a SEP.
Like with most retirement plans, you can start withdrawing money from a SEP IRA at age 59 ½ without penalty. Early withdrawals are typically subject to a 10% penalty and income tax, unless they meet certain exceptions.
In 2025, employers can contribute up to 25% of compensation, up to a maximum contribution of $70,000.
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