SEP Plans Made Simple: Your Questions Answered
By Deborah Shipman, CIP, CISP, CHSP
A simplified employee pension (SEP) plan is a type of retirement plan that is generally used by self-employed individuals and small businesses. It offers many advantages not available with qualified retirement plans, such as being simple to establish and maintain, having easy-to-understand documents, and not creating a fiduciary liability for investments. Even though a SEP plan may be easier for an employer to maintain, questions from both employers and employees still arise.
Can an employer establish a Roth SEP plan?
No. A SEP plan must be established in conjunction with a Traditional IRA. Employers make SEP contributions to eligible employees’ Traditional IRAs.
Can an individual make IRA contributions and receive SEP contributions for the same year?
Yes. Eligible individuals can receive SEP contributions and make contributions to their Traditional IRAs and Roth IRAs for the same year. (The deductibility of a Traditional IRA contribution made by a person receiving a SEP contribution will be determined by his modified adjusted gross income.) IRA contributions and SEP contributions are reported in different boxes on IRS Form 5498, IRA Contribution Information.
Can an employer have both a SEP plan and a SIMPLE IRA Plan?
No. SIMPLE IRA plans have an exclusive plan rule that prohibit employers from operating any other plan under which contributions are made or benefits accrue for the same year.
Can an individual move her SEP IRA to another IRA?
Yes. Because SEP plan assets are held in a Traditional IRA, they follow the Traditional IRA portability rules. SEP plan assets can be transferred at any time or rolled over within 60 days to another SEP or Traditional IRA. SEP plan assets can also be converted directly or indirectly to a Roth IRA; this is a taxable event and if done indirectly, is also subject to the 60-day rule.
If a SEP plan contribution is made for the prior-year, should the financial organization report the contribution for the year in which it was received or for the year that it was for?
Financial organizations must report SEP contributions for the year in which they are received. For example, if an employer makes a SEP contribution in 2022 for tax year 2021, the financial organization should report the contribution on the 2022 Form 5498 as a 2022 SEP plan contribution. The employer must indicate that the SEP plan contribution was for the prior year when she files her tax return.
Are SEP contributions reported differently than Traditional IRA contributions?
SEP contributions are reported in Box 8, SEP contributions, on Form 5498, while Traditional IRA contributions are reported in Box 1, IRA contributions (other than amounts in boxes 2-4, 8-10, 13a, and 14a). If SEP contributions are made to an IRA that also receives non-SEP assets (i.e., regular contributions, rollover contributions, or transfer contributions), Box 7, the IRA box, will be marked on Form 5498. If SEP contributions are made to an IRA that holds only SEP assets, Box 7, the SEP box, will be marked on Form 5498.
How are SEP excess contributions handled?
Depending on the facts involved and the reason for the excess, solutions can be found in the IRS’s SEP Fix-It Guide . The employer or the employer’s tax advisor should refer to the guide in order to determine the solution and the steps needed for the correction.
