What is a SEP (Simplified Employee Pension Plan)?
Generally, you can deduct the contributions you make each year to each employee's SEP-IRA. If you are self-employed, you can deduct the contributions you make each year to your own SEP-IRA.
A SEP is a written plan that allows you to make contributions toward your own retirement (if you are self-employed) and your employees' retirement without getting involved in a more complex qualified plan.
Under a SEP, you make the contributions to a traditional individual retirement arrangement (called a SEP-IRA) set up by or for each eligible employee. A SEP-IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP-IRA is maintained.
SEP-IRAs are set up for, at a minimum, each eligible employee. An eligible employee is an individual who meets all the following requirements.
- Has reached age 21.
- Has worked for you in at least 3 of the last 5 years.
- Has received at least $500 in compensation from you in 2011. This amount remains the same in 2012.
See IRS Pub. 560 for details.