Establishing a SEP Plan
You can set up a SEP plan for a given year by the due date, including extensions, for your business’s income tax return for that year. For eligible employers, this is done using IRS Form 5305-SEP, “Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement.” The agreement is considered adopted when the form is completed, SEP IRAs are set up for all eligible employees and these employees have been provided with certain required information, including copies of the form. Form 5305-SEP doesn’t need to be filed with the IRS.
As the employer, you receive a current income tax deduction for contributions made on behalf of your employees. Employees generally aren’t taxed on traditional SEP plan contributions when they’re made, but distributions are taxed when they occur, typically at retirement.
Employers with SEP plans may allow employees to have SEP plan contributions made to a Roth IRA (Roth SEP) on an after-tax basis. Contributions are taxed in the year made, but qualified Roth withdrawals may be tax‑free. This is optional and relatively new, and not all plans offer it.
For 2026, the maximum deductible contribution you can make to a SEP-IRA — and that can be excluded from employees’ income — is the lesser of: 1) 25% of compensation, or 2) $72,000 per employee. If a business owner doesn’t receive a W-2 from the business (for instance, an unincorporated sole proprietor), the calculation for the contribution to be made on the owner’s behalf varies slightly.
Your employees can’t contribute, but they do control their individual SEP IRAs, including choosing investments (from available options).
Additional Considerations
There are other factors to consider when establishing a SEP plan. Essentially, all regular employees who meet eligibility requirements must be included in the plan, and contributions can’t favor highly compensated employees.
Additionally, SEP plans generally don’t require the detailed records that many other retirement plans, such as 401(k) plans, must maintain. There are also no annual reports to file with the IRS, and much of the required recordkeeping can be handled by the SEP-IRA trustee — such as a bank or brokerage firm.
Evaluate Your Options
For certain businesses with 100 or fewer employees, Savings Incentive Match Plans for Employees (SIMPLEs) may be an option:
SIMPLE IRA. The employer establishes a SIMPLE IRA for each eligible employee and makes the required matching or 2% nonelective contribution. SIMPLEs are generally subject to fewer and simpler requirements than 401(k)s.
SIMPLE 401(k). This is a SIMPLE structured as a 401(k). If certain rules are met, it isn’t subject to the otherwise complex nondiscrimination rules that normally apply to 401(k)s.
For 2026, employee elective deferrals to SIMPLE IRAs or SIMPLE 401(k)s are generally limited to $17,000. Employees age 50 and older may also make additional catch-up contributions.
Seeking Guidance
Choosing the right retirement plan depends on your business size, cash flow and long-term goals. Contact the office to discuss your options and determine which best supports your needs.
