irs publication 4333

7/30/2019 IRS Publication 4333

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SEP Retirement Plans for Small Businesses is a joint project of theU.S. Department of Labors Employee Benefits Security Administration (DOL/EBSA)and the Internal Revenue Service.

To view this and other EBSA publications, visit the agencys website at:

www.dol.gov/ebsa.To order publications, contact us electronically at:www.askebsa.dol.gov.Or call toll free: 866-444-3272.For assistance from a benefits advisor, visit EBSAs website at www.dol.gov/ebsaand click on Request Assistance.Or call toll free: 866-444-3272.

SEP Retirement Plans for Small Businesses(IRS Publication 4333) is also available from the Internal Revenue Service at: 800-TAX-FORM (829-3676).

(Please indicate catalog number 38507U when ordering.)

This publication will be made available in alternative format to persons with disabilities uponrequest:Voice phone: (202) 693-8664TDD: (202) 501-3911

This publication constitutes a small entity compliance guide for purposes of the Small Business Regulatory Enforcement Fairness Act of 199It does not constitute legal, accounting, or other professional advice.


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Looking for an easy and low-cost

retirement plan? Why not consider

a SEP?

Simplified Employee Pension (SEP) planscan provide a significant source of income

at retirement by allowing employers to setaside money in retirement accounts for them-selves and their employees. Under a SEP, anemployer contributes directly to traditionalindividual retirement accounts (SEPIRAs)for all employees (including themselves). ASEP does not have the startup and operatingcosts of a conventional retirement plan andallows for a contribution of up to 25 percentof each employees pay.

Advantages of a SEP

q Contributions to a SEP are tax deductibleand your business pays no taxes on theearnings on the investments.

qYou are not locked into making contribu-tions every year. In fact, you decide eachyear whether, and how much, to contrib-ute to your employees SEPIRAs.

q Generally, you do not have to file anydocuments with the government.

q Sole proprietors, partnerships, and corpo-rations, including S corporations, can setup SEPs.

qYou may be eligible for a tax credit ofup to $500 per year for each of the first 3years for the cost of starting the plan.

qAdministrative costs are low.As you read through this booklet, here aresome definitions you will find helpful:

Employee An employee is not only some-one who works for you, but also includesyou if you receive compensation from thebusiness. In other words, you can contributeto a SEPIRA on your own behalf. The termalso includes employees of certain other busi-nesses you and/or your family own and cer-

tain leased employees.

Eligible Employee An eligible employee is anemployee who:

1. Is at least 21 years of age, and2. Has performed service for you in at least 3

of the last 5 years.

All eligible employees must participate in the

plan, including parttime employees, seasonalemployees, and employees who die or termi-nate employment during the year.

Your SEP may also cover the followingemployees, but there is no requirement tocover them:

q Employees covered by a union contract;q Nonresident alien employees who did not

earn income from you;

q Employees who received less than $550 incompensation during the year (subject tocostofliving adjustments).

Compensation The term generally includesthe pay an employee received from you fora years work. As the owner/employee, yourcompensation is the pay you received fromthe company. Employers must follow thedefinition of compensation included in theplan document.

ESTABLISHING THE PLANThere are just a few simple steps to establisha SEP.

Step 1: Contact a retirement plan profes-sional or a representative of a financial insti-tution that offers retirement plans and choose

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the IRS model SEP, Form 5305SEP, SimplifiedEmployee Pension Individual Retirement

Accounts Contribution Agreement, or anotherplan document offered by the financial insti-tution. Regardless of the SEP document youchoose, when filled in, it will include thename of the employer, the requirements for

employee participation, the signature of aresponsible official, and a written allocationformula for the employers contribution.

A SEP may be established as late as the duedate (including extensions) of the companysincome tax return for the year you want toestablish the plan. For example, if your busi-nesss fiscal year (a corporate entity) ends onDecember 31 and you filed for the automatic

6month extension, the companys tax returnfor the year ending December 31, 2011,would be due on September 17, 2012, allow-ing you to make the initial SEP contributionno later than September 17, 2012.

Choosing a financial institution for your SEPis one of the most important decisions youwill make, since that entity becomes a trust-ee to the plan. Trustees work closely withemployers and agree to:

q Receive and invest contributions, andq Provide each participant with a notice of

employer contributions made each yearand the value of his/her SEPIRA at theend of the year.

Trustees of SEPIRAs are generally banks, mutu-al funds, insurance companies that issue annu-ity contracts, and certain other financial institu-

tions that have been approved by the IRS.

Step 2: Complete and sign Form 5305SEP(or other plan document, if not using theIRS model form). When it is completed andsigned, this form becomes the plans basiclegal document, describing your employeesrights and benefits. Do not send it to the

IRS; instead, use it as a reference since it setsout the plans terms (e.g., eligible employees,compensation, and employer contributions).

Step 3: Give your employees a copy ofthe Form 5305SEP (or other plan docu-ment, if not using the IRS model form) and

its instructions, along with certain informa-tion about SEPIRAs (described in EmployeeCommunications below). The model SEP isnot considered adopted until each employeeis provided with a written statement explain-ing that:

1. A SEPIRA may provide different rates ofreturn and contain different terms thanother IRAs the employee may have;

2. The administrator of the SEP will providea copy of any amendment within 30 daysof the effective date, along with a writtenexplanation of its effects; and

3. Participating employees will receive a writ-ten report of employer contributions madeto SEPIRAs by January 31 of the followingyear.

OPERATING THE PLANOnce in place, a SEP is simple to operate.

Your trustee will take care of depositing thecontributions, investments, annual statements,and any required filings with the IRS. Youwill need to ensure that your plan is keptcurrent with the law.

Contributions to SEP-IRA Accounts

Your obligation is to forward contributionsto your financial institution/trustee for thoseemployees who participate as described inyour plan document. You will want to keep

your financial institution aware of any changesin the status of those employees in the plan.As you hire new employees, for instance, youwill include them in the SEP if they satisfy theeligibility criteria described in the plan.

Your contributions to each employees SEP-IRA account for a year cannot exceed the

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lesser of 25 percent of the employees com-pensation for the year or a dollar amountthat is subject to costofliving adjustments.The dollar amount for 2011 is $49,000 andfor 2012 is $50,000. These limits apply toyour total contributions to this plan and anyother defined contribution plans (other SEPs,

401(k), 403(b), profit sharing, or money pur-chase plan) you have.

You do not have to make contributions everyyear. When you contribute, you must con-tribute to the SEPIRAs of all participants whoactually performed work for your businessduring the year for which the contributionsare made, even employees who die or ter-minate employment before the contributions

are made. Contributions for all participantsgenerally must be uniformfor example, thesame percentage of compensation.

Employee salary reduction contributions can-not be made under a SEP.

There are special rules if you are a selfemployed individual. For more informa-tion on the deduction limitations for selfemployed individuals, see IRS Publication

560,Retirement Plans for Small Business (SEP,SIMPLE, and Qualified Plans).

How Does a SEP Work?

Quincy Chintz Company decides to establisha SEP for its employees. Quincy has chosena SEP because the chintz industry is cyclical innature, with good times and down times. Ingood years, Quincy can make larger contribu-tions for its employees, and in down times itcan reduce the amount. Quincy knows that

under a SEP, the contribution rate (whetherlarge or small) must be uniform for all employ-ees. The financial institution that Quincy hasselected to be the trustee for its SEP has sev-eral investment funds from which the Quincyemployees can choose. Individual employeeshave the opportunity to divide their employerscontributions to their SEPIRAs among the fundsmade available to Quincys employees.

Employee Communications

When employees participate in a SEP, theymust receive certain key disclosure docu-ments from you and/or the financial institu-tion/trustee:

qYou must give employees a copy of IRSForm 5305SEP and its instructions (orother document that was used to establishthe plan). When new employees becomeeligible to participate in the plan, they alsomust receive a copy of the plan.

qYou must also provide a written statementcontaining information about the termsof the SEP, how changes are made to theplan, and when employees are to receive

information about contributions to theiraccounts. (See Step 3 above.)

q In addition to the information above, thefinancial institution provides an annualstatement for each participants SEPIRA,reporting the fair market value of thataccount.

qThe financial institution also gives partici-pating employees a copy of the annual

statement filed with the IRS contain-ing contribution and fair market valueinformation. (See Reporting to theGovernmentbelow.)

q When an employee participating in theplan receives distributions from his/heraccount, the financial institution sendshim/her a copy of the form that is filedwith the IRS for the individuals distribu-tion. (See Reporting to the Government

below.)

qThe financial institution will notify the par-ticipant by January 31 of each year whena minimum distribution is required.

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Reporting to the Government

SEPs generally are not required to fileannual financial reports with the FederalGovernment. SEPIRA contributions are notincluded on the Form W2, Wage and TaxStatement.

The financial institution/trustee handlingemployees SEPIRAs provides the IRS andparticipating employees with an annual state-ment containing contribution and fair mar-ket value information on Form 5498,IRAContribution Information.

Your financial institution also will report onForm 1099R,Distributions From Pensions,Annuities, Retirement or Profit-Sharing Plans,

IRAs, Insurance Contracts, etc., any distribu-tions it makes from participating employeesaccounts. The Form 1099R is sent to thosereceiving distributions and to the IRS.

Distributions

Participants cannot take loans from theirSEPIRA.

However, participants can make withdraw-als at any time. These monies can be rolled

over tax free to another SEPIRA, to anothertraditional IRA, or to another employers qual-ified retirement plan (provided the other planallows rollovers).

Money withdrawn from a SEPIRA (and notrolled over to another plan) is subject toincome tax for the year in which an employ-ee receives a distribution. If an employeewithdraws money from a SEPIRA before age59 1/2, a 10 percent additional tax generally

applies.

As with other traditional IRAs, participantsin a SEPIRA must begin withdrawing a spe-cific minimum amount from their accountsby April 1 of the year following the year theparticipant reaches age 70 1/2. For the yearfollowing the year in which a participant

reaches age 70 1/2, he/she must withdrawan additionalrequired minimum distributionamount by December 31 of that year andannually thereafter. The financial institution/trustee will notify the participant by January31 of each year when a minimum distribu-tion is required. (See IRS Publication 590,Individual Retirement Arrangements (IRAs),

regarding required distributions.)

Monitoring the Trustee

As the plan sponsor, you should monitor thefinancial institution/trustee to assure that it isdoing everything it is required to do. Youshould also ensure that the trustees fees arereasonable for the services it is providing. Ifthe trustee is not doing its job properly, or ifits fees are not reasonable, you should con-sider replacing the trustee.

TERMINATING THE PLANAlthough SEPs are established with the inten-tion of continuing indefinitely, the time maycome when a SEP no longer suits the pur-poses of your business. When that happens,consult with your financial institution todetermine if another type of retirement planmight be a better alternative.

To terminate a SEP, notify the financial insti-tution that you will not make a contributionfor the next year and that you want to termi-nate the contract or agreement. Although notmandatory, it is a good idea to notify youremployees that the plan will be discontinued.You do not need to give any notice to theIRS that the SEP has been terminated.

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Order from:

DOL: 866-444-3272IRS: 800-TAX-FORM (829-3676)

Related materials available from DOL:

DOL sponsors two interactive websites the Small Business Advisor, available at

www.dol.gov/elaws/pwbaplan.htm, and,along with the American Institute of CertifiedPublic Accountants (AICPA), www.choosin-garetirementsolution.org. These encouragesmall business owners to choose the appro-priate retirement plan for their business andprovides resources on maintaining plans andcorrecting plan errors.

Related materials available from the IRS:

qPublication 560,Retirement Plans forSmall Business (SEP, SIMPLE, and

Qualified Plans).

qPublication 590,Individual RetirementArrangements (IRAs).

q Publication 3066,Have you had yourCheck-up this year? for Retirement Plans.

qThe IRS Retirement Plans Navigator,www.retirementplans.irs.gov, encouragessmall businesses owners to choose theright retirement plan for their businessand provides resources on maintainingplans and correcting plan errors.

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December 2011


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irs publication 4333

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