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A SEP, or Simplified Employee Pension, is a retirement plan put in place by an employer for the benefit of themselves and their employees. In addition to allowing for tax deferred retirement
savings for themselves, the employer benefits from setting up a SEP by being allowed a tax deduction for contributions made to employees' SEP accounts. A SEP is often a good choice for small businesses due to its simplicity and low costs compared to many other retirement plan options. Indeed, SEP plans do not have the federal paperwork filing requirements that many other retirement plan options do. SEP plans are also very flexible. Employers may decide year to year whether to make contributions to the employee's SEP accounts and the amount of those contributions (subject to IRS limits).

In order to establish an SEP plan, the employer must follow three steps.
Step 1: Execute an SEP agreement (e.g. a SEP IRS model - Form 5305-SEP, a IRS approved prototype SEP, or an individually designed SEP).
Step 2: Provide information about the SEP plan to employees.
Step 3: Ensure that an SEP-IRA account is set up for each eligible employee. SEP-IRA accounts are typically set up by the employee.

SEP plans can be established by partnerships, corporations, and S corps. The self-employed (i.e. sole proprietor) can also set up a SEP for themselves. If an employer decides to offer a SEP plan, such plan must be set up for all eligible employees. To be considered an eligible employee, the employee must be at least 21 years old and have worked for the employer in at least 3 of the last 5 years. Employees have the discretion over the investment options in their SEP accounts but only employers can fund the SEP. All contributions to an employee's SEP account are immediately vested 100%.

For more information on SEP plans please see IRS publication 560.

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