SEP Plan FAQs - Contributions
How much can I contribute to my SEP?
The contributions you make to each employee’s SEP-IRA each year cannot exceed the lesser of:
- 25% of compensation, or
- $50,000 (for 2012; $51,000 for 2013 and subject to annual cost-of-living adjustments for later years).
These limits apply to contributions you make for your employees to all defined contribution plans, which includes SEPs. Only up to $250,000 in 2012 ($255,000 in 2013 and subject to cost-of-living adjustments for later years) of an employee’s compensation may be considered.
Contributions must be made in cash; you cannot contribute property.
How much can I contribute if I’m self-employed?
The same limits on contributions made to employees’ SEP-IRAs also apply to contributions if you are self-employed. However, special rules apply when figuring the maximum deductible contribution. See Publication 560 for details on determining the contribution amount.
Must I contribute the same percentage of salary for all participants?
Most SEPs, including the IRS model Form 5305-SEP, require you to make allocations proportional to your employees' salary/wages. This means that everyone’s contribution is the same percentage of salary. If you are self-employed, base your contribution on net profit - minus one-half of the self-employment tax - minus your SEP contribution. See IRS Publication 560 on determining the contribution amount.
If I participate in a SEP plan, can I also make tax-deductible traditional IRA contributions to my SEP-IRA?
If the SEP-IRA permits non-SEP contributions, you can make regular IRA contributions (including IRA catch-up contributions if you are age 50 and older) to your SEP-IRA, up to the maximum annual limit. However, the amount of the regular IRA contribution that you can deduct on your income tax return may be reduced or eliminated due to your participation in the SEP plan.
If I participate in a SEP plan, can I contribute to a Roth IRA in addition to receiving contributions under the SEP plan?
A SEP-IRA is a traditional IRA that holds contributions made by an employer under a SEP plan. You can both receive employer contributions to a SEP-IRA and make regular, annual contributions to a traditional or Roth IRA. Employer contributions made under a SEP plan do not affect the amount you can contribute to an IRA on your own behalf.
Because a SEP-IRA is a traditional IRA, you may be able to make regular, annual IRA contributions to this IRA, rather than opening a separate IRA account. However, any dollars you contribute to the SEP-IRA will reduce the amount you can contribute to other IRAs, including Roth IRAs, for the year.
Example (1): Nancy’s employer, JJ Handyman, contributes $5,000 to Nancy’s SEP-IRA at ABC Investment Co. based on the terms of the JJ Handyman SEP plan. Nancy, age 45, is permitted to make traditional IRA contributions to her SEP-IRA account at ABC Investment Co., and she contributes $3,000 in 2012. If Nancy also wants to contribute to her Roth IRA at XYZ Investment Co. for 2012, she can contribute $2,000 ($5,000 maximum contribution less the $3,000 already contributed to her SEP-IRA) by April 15, 2013.
Example (2): Nancy, age 45, is the owner and sole employee of JJ Investment Advisors. Nancy contributes the maximum allowable amount to her SEP-IRA for 2012, or $50,000. Nancy may also make regular, annual IRA contributions to her SEP-IRA, if her SEP-IRA allows this, or contribute to her Roth IRA at XYZ Investment Co. Her total traditional IRA and Roth IRA contributions cannot exceed $5,000 for 2012 and may be made in addition to her SEP contributions.
Can I make catch-up contributions to my SEP?
No, SEPs are funded by employer contributions only. Catch-up contributions apply only to employee elective deferrals. However, if you are permitted to make traditional IRA contributions to your SEP-IRA account, you may be able to make catch-up IRA contributions.
Must I contribute to the SEP every year?
No, you are not required to contribute every year. In years you do contribute to the SEP, the contributions must be made to the SEP-IRAs of all eligible employees.
Do I have to contribute for a participant who is no longer employed on the last day of the year?
Yes, you do, if they are otherwise eligible for a contribution. A SEP cannot have a last-day-of-the-year employment requirement. If the employee is otherwise eligible, they must share in any SEP contribution. This includes eligible employees who die or quit working before the contribution is made.
Can I contribute to the SEP-IRA of a participant over age 70 ½?
You must contribute for each employee eligible to participate in your SEP, even if they are over age 70 ½. The employee must also take minimum distributions, however.
Depositing and deducting contributions
When must I deposit the contributions into the SEP-IRAs?
You must deposit contributions for a year by the due date (including extensions) for filing your federal income tax return for the year. If you obtain an extension for filing your tax return, you have until the end of that extension period to deposit the contribution, regardless of when you actually file the return.
If you did not request an extension to file your tax return and did not deposit the SEP plan contributions by the filing due date for that return, you are not allowed to deduct any SEP plan contributions on that year’s return. The contributions may be deducted on the following year’s return.
If you improperly deducted SEP plan contributions on your return, you must file an amended tax return as soon as possible.
How much of the SEP contributions are deductible?
The most you can deduct on your business’s tax return for contributions to your employees’ SEP-IRAs is the lesser of your contributions or 25% of compensation. (Compensation considered for each employee is limited and subject to annual cost-of-living adjustments). If you are self-employed and contribute to your own SEP-IRA, there is a special computation to figure the maximum deduction.
Are employer contributions taxable to employees?
No, contributions to employees’ SEP-IRAs are not included in their gross income, unless they are excess contributions.
What are the consequences to employees if I make excess contributions?
Excess contributions are included in employees' gross income. Employees who withdraw the excess contribution (plus earnings) before the due date for their federal return, including extensions, will avoid the 6% excise tax imposed on excess SEP contributions in an IRA. Excess contributions left in the employee’s SEP-IRA after that time will be subject to the 6% tax on the employees’ IRAs, and the employer may be subject to a 10% excise tax on the excess nondecuctible contributions.
If my SEP plan fails to meet the SEP requirements, are the tax benefits for me and my employees lost?
Generally, tax benefits are lost if the SEP fails to satisfy the Internal Revenue Code requirements. However, you can retain the tax benefits if you use one of the IRS correction programs to correct the failure. In general, your correction should put employees in the position they would have been had the failure not occurred.
Why is last year’s contribution that was made this year for the SEP-IRA shown on this year’s Form 5498 instead of last year’s Form 5498?
The IRS requires contributions to a SEP-IRA to be reported on the Form 5498 for the year they are actually deposited to the account, regardless of the year for which they are made.