The SEP Plan: Another Connection to Small Employers

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By Steve Christenson, Executive Vice President, Ascensus


Your financial organization may have a history of helping local employers by providing them small business loans to expand and grow their businesses, and commercial checking accounts so that they can conduct their day-to-day business operations.

But what if your organization could also help local business owners invest in their own futures and retain good employees? With the largest percentage of Americans actively working in decades—the latest national unemployment figure was 3.6 percent—employers across the country are facing greater competition for workers. Now more than ever, employee benefits—specifically healthcare and retirement benefits—play a key role in whether someone will work for an employer and whether they will stay with that employer.

The Coverage Gap

Roughly 55 million American workers do not have access to an employer-sponsored retirement plan. This lack of access is more pronounced with micro employers (1–50 employees) and small employers (51–99 employees). In fact, only 48 percent of employees in the micro market have access to a retirement plan. That number increases to 67 percent for small employers.

With that much of a coverage gap, it’s understandable why state and local governments have started to step in with other retirement savings options. Without some sort of driver, either through an employer or via financial education, the average employee will not seek out a retirement savings option on her own. Banks and credit unions have an opportunity to fill the coverage gap by offering retirement savings plans suited for small businesses, such as a simplified employee pension (SEP) plan and a savings incentive match plan for employees of small employers (SIMPLE) IRA plan. Here we will focus on the SEP plan.

A Solution for Small Employers

A SEP plan is available to nearly every type of business, but usually it attracts small employers or self-employed individuals. In a SEP plan, the business owner can choose to make contributions (according to specific formulas) to her own Traditional IRA and her eligible employees’ Traditional IRAs up to a maximum of 25 percent of the employee’s compensation for that year or $56,000 (for 2019), whichever is less.

A SEP plan offers many of the same advantages of other employer-sponsored plans, but generally is easier and less expensive to maintain. A SEP plan benefits both the employer and its employees in the following ways.


  • Less expensive to maintain

  • Relief from fiduciary liability for investment performance

  • No nondiscrimination or coverage testing

  • Deductible employer contributions

  • Discretionary employer contributions

  • Start-up tax credit

  • Owners receive contributions


  • Opportunity to save for retirement

  • Tax-deferred contributions and earnings until distributed

  • Employer funds contributions to the employee’s Traditional IRA

  • Employee owns the Traditional IRA contributions immediately

Easy for Employers

How difficult is it to establish a SEP plan? The process of establishing a SEP plan is easy. The bank or credit union provides the employer with a SEP plan document based on IRS Form 5305-SEP, Simplified Employee Pension-Individual Retirement Accounts Contribution Agreement. The employer then makes elections on the document and signs the document before the employer’s tax return due date, plus extensions. At that time, the plan is created. The employer must then provide its employees with some type of SEP plan disclosure statement containing the general SEP plan rules and plan provisions.

Eligible employees, including the business owner, also must establish Traditional IRAs to receive their contributions. This is an ideal opportunity to acquire new or cross-sold clients, as employees may establish their Traditional IRAs wherever they choose. Your organization may be able to coordinate with the employer to provide education and streamline the Traditional IRA establishment process to encourage (but not require) enrollment with your financial organization.

Easy for Financial Organizations

There is little investment that your organization must make to enter or raise its profile in this market. Your organization likely already has much of what’s needed to offer a SEP plan program.

SEP Plan Document for Employers

Your financial organization can offer employers a SEP plan document by using the IRS model document or one from a forms provider. Your organization can elect—or not—to charge employers when initially providing the document, or annually for maintaining it.

Traditional IRA Document for Employees

The IRA opening documents for a Traditional IRA that will accept SEP plan contributions can be the same documents used for all Traditional IRAs that your organization services today.

Required Reporting

Your organization must report SEP plan contributions that are made to employees’ Traditional IRAs, just as it would report annual IRA contributions to those accounts, on the same IRS Form 5498, IRA Contribution Information. No additional forms reporting is required. The difference lies in properly coding the contributions as SEP plan contributions in your operating system, notably for the current year; there is no carry-back reporting of SEP contributions. Most data processing systems already have this contribution type programmed.

The key differentiator for your financial organization will be its willingness to educate both staff and small business clients. Your organization should be able to provide its employer clients with a baseline education about the rules and benefits of a SEP plan. But most importantly, your employer clients should be able to educate their employees on the value of the SEP plan and what it means for their futures. Assisting employers, and, ultimately, their employees, by providing helpful information will lead to successful SEP plans and stronger bonds with your bank or credit union.