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SEP IRAs and Your Small Business

The SEP IRA or Simplified Employee Pension Plan is different than a 401(k) or SIMPLE IRA retirement plan. This type of plan provides for greater contribution amounts, greater flexibility when it comes to contributions, and little restrictions. Here are some answers to common questions about SEP IRAs.

WHAT IS A SEP IRA? 

A SEP IRA is ideal for any small business whether they are self-employed or have employees (part-time, full-time, or long-term). It works well for businesses who have fluctuating profits, employ few individuals part-time or full-time, family members, and are seeking little administrative requirements or costs for their plan. All contributions to this plan are fully funded by the business owner.

WHAT ARE THE ADMINISTRATIVE RESPONSIBILITIES?

The first phase of establishing a SEP IRA is completing a SEP adoption agreement which outlines the provisions of the plan. Once the adoption agreement is completed and the plan is established, the employer gives the agreement to all eligible employees. 

Eligibility guidelines for employees is simple and can be more relaxed but cannot be more restrictive. Employees must be eligible at a minimum if the individual has: (1) reached age 21, (2) worked a minimum of one hour in at least three of the previous five years, and (3) earned at least $600 during the current year which the employer is making the contribution for. Eligibility requirements apply to all employees including business owners.

Contributions are made by the employer only and are made directly to each eligible employee’s SEP IRA. Employee salary deferrals cannot be made to a SEP IRA except for grandfathered SAR-SEP IRAs. In addition, contributions are due to employees by the business tax filing deadline or tax extension deadline.

There are no requirements to file documents with the IRS other than an IRS form 5498 which is provided by the custodian of each IRA. Announcement to employees are required concerning when and how much the business contributes to an employee SEP IRA account for the year.

SEP IRA CONTRIBUTION LIMITS FOR 2019

Employee Maximum Contributions
Catch-Up Contributions (if age 50 or Older)
Employer Contribution
Unincorporated & Self-Employed Business Owners
Not Applicable
Not Applicable
Up to 25% of compensation up to a maximum of $56,000. Compensation Cap is $280,000
CONSULT WITH YOU TAX ADVISOR REGARDING CONTRIBUTIONS

RESOURCES FROM IRS.GOV: Simplified Employee Pension Plan (SEP) Page -- Publication 4333 - SEP Retirement Plans for Small Business -- Form 5305-SEP 

WHAT ARE THE BENEFITS & IS THIS MY BEST OPTION?

Simplicity and flexibility are key when considering a SEP IRA. The flexibility of contributions is a major benefit to any small business owner and higher contribution amounts may provide for greater tax savings. 

Administrative requirements are also less stringent in comparison to other plans. Investment choices are also flexible and are self-managed eliminating the need for a business owner to develop a comprehensive list of investment vehicles.

All employees benefit in terms of tax-deferred growth and inherent flexibility in rollovers and transfers, a SEP IRA can be rolled over into a traditional IRA or into another SEP IRA plan. In addition, existing Traditional IRAs can be recoded as SEP IRAs and will accept the IRA owner’s personal IRA contribution.

WHO CAN I WORK WITH TO MANAGE MY RETIREMENT PLAN?

Financial coaching and development should be an important part of your retirement plan and is a value-added benefit for you and your employees. A financial advisor can provide the investment guidance needed to help you and your employees achieve retirement goals. You and your employees deserve to know that your retirement is being taken care of and that you have a coach available to assist you in these matters. 

Is Your Business in California?

Did you know that California businesses will be required to offer their employees retirement plans? Any California employer with five or more employees is required to establish a company sponsored retirement plan or must provide their employees with the opportunity to participate in the CalSavers program starting July 1, 2019.

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Our Firm Can Help Your Small Business

MCF Capital Management, LLC is an independent, family-run, financial advisory firm that bases its investment approach on quantitative market data analysis. One of our key focuses is small and medium-sized businesses. Our firm’s dedication to business owners not only covers managing the needs of your business, but also the needs of your employees. 


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The opinions expressed here reflect the judgement of the author(s) as of this date and are subject to change without notice. Information presented here is for informational purposes only and does not intend to make an offer, solicitation, or recommendation for the sale or purchase of any product, security, or investment strategy. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here. The information being provided is strictly as a courtesy.

MCF CAPITAL MANAGEMENT, LLC DOES NOT PROVIDE TAX ADVICE. PLEASE CONSULT WITH A TAX ADVISOR REGARDING YOUR SPECIFIC CIRCUMSTANCE.