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May 2022

SEPs are so Simple – Be Eagar to Seek and Accept SEP-IRA Contributions Establishing a SEP

Who can establish a SEP?
Any employer, including self-employed individuals, can establish a SEP.

Is there a deadline to set up a SEP?
You can set up a SEP plan for a year as late as the due date (including extensions) of your business's income tax return for that year.

If I have a SEP, can I also have other retirement plans?
You can maintain both a SEP and another plan. However, unless the other plan is also a SEP, you cannot use Form 5305-SEP; you must adopt either a prototype SEP or an individually designed SEP.

Can I set up a SEP for my self-employment income if I participate in my employer's retirement plan?
Yes, you can set up a SEP for your self-employed business even if you participate in your employer's retirement plan at a second job.

Can each partner in a partnership maintain a separate SEP plan?
No, only an employer can maintain and contribute to a SEP plan for its employees. For retirement plan purposes, each partner or member of an LLC taxed as a partnership is an employee of the partnership.

Which employees are eligible to participate in my SEP plan?
Employees must be included in the SEP plan if they have:
• attained age 21;
• worked for your business in at least 3 of the last 5 years; and
• received at least $650 in 2021 and 2022;
Your plan may use less restrictive requirements, for example age 18 or three months of service, to determine which employees are eligible.

Are the eligibility requirements the same for all employees in a SEP plan, including owners?
Yes. The eligibility provisions stated in the SEP plan document must apply equally to owners and employees.

How much can I contribute to my SEP?
The contributions you make to each employee's SEP-IRA each year cannot exceed the lesser of:
1. 25% of compensation, or
2. $61,000 for 2022 ($58,000 for 2021; $57,000 for 2020 and subject to annual cost-of-living adjustments for later years).
These limits apply to contributions you make for your employees to all defined contribution plans, which includes SEPs. Compensation up to $305,000 in 2022 ($290,000 in 2021; $285,000 in 2020 and subject to cost-of-living adjustments for later years) of an employee's compensation may be considered. If you're self-employed, use a special calculation to determine contributions for yourself.

Contributions must be made in cash; you cannot contribute property.
If you've contributed more than the annual limits to your SEP plan, find out how to correct this mistake.

How much can I contribute if I'm self-employed?
The same limits on contributions made to employees' SEP-IRAs also apply to contributions if you are self-employed. However, special rules apply when figuring the maximum deductible contribution. See Publication 560 for details on determining the contribution amount.

Must I contribute the same percentage of salary for all participants?
Most SEPs, including the IRS model Form 5305-SEP, require you to make allocations proportional to your employees' salary/wages. This means that everyone's contribution is the same percentage of salary.

If you are self-employed, base your contribution on net profit - minus one-half of the self-employment tax - minus your SEP contribution. See IRS Publication 560 on determining the contribution amount.

If I participate in a SEP plan, can I also make tax-deductible traditional IRA contributions to my SEP-IRA?
If the SEP-IRA permits non-SEP contributions, you can make regular IRA contributions (including IRA catch-up contributions if you are age 50 and older) to your SEP-IRA, up to the maximum annual limit. However, the amount of the regular IRA contribution that you can deduct on your income tax return may be reduced or eliminated due to your participation in the SEP plan.

Must I contribute to the SEP every year?
No, you are not required to contribute every year. In years you do contribute to the SEP, the contributions must be made to the SEP-IRAs of all eligible employees.

Do I have to contribute for a participant who is no longer employed on the last day of the year?
Yes, you do, if they are otherwise eligible for a contribution. A SEP cannot have a last-day-of-the-year employment requirement. If the employee is otherwise eligible, they must share in any SEP contribution. This includes eligible employees who die or quit working before the contribution is made. If you haven't made a contribution for an eligible employee in your SEP plan, find out how you can correct this mistake.

Can I contribute to the SEP-IRA of a participant over age 72?
You must contribute for each employee eligible to participate in your SEP, even if they are over age 72. The employee must also take minimum distributions.

When must I deposit the contributions into the SEP-IRAs?
You must deposit contributions for a year by the due date (including extensions) for filing your federal income tax return for the year. If you obtain an extension for filing your tax return, you have until the end of that extension period to deposit the contribution, regardless of when you actually file the return.

How much of the SEP contributions are deductible?
The most you can deduct on your business's tax return for contributions to your employees' SEP-IRAs is the lesser of your contributions or 25% of compensation. (Compensation considered for each employee is limited and subject to annual cost-of-living adjustments). If you are self-employed and contribute to your own SEP-IRA, there is a special computation to figure the maximum deduction.

Are employer contributions taxable to employees?
No, contributions to employees' SEP-IRAs are not included in their gross income, unless they are excess contributions.

If my SEP plan fails to meet the SEP requirements, are the tax benefits for me and my employees lost?
Generally, tax benefits are lost if the SEP fails to satisfy the Internal Revenue Code requirements. However, you can retain the tax benefits if you use one of the IRS correction programs to correct the failure. In general, your correction should put employees in the position they would have been had the failure not occurred.

Reporting Requirements
Why is last year's contribution that was made this year for the SEP-IRA shown on this year's Form 5498 instead of last year's Form 5498?
The IRS requires contributions to a SEP-IRA to be reported on the Form 5498 for the year they are actually deposited to the account, regardless of the year for which they are made.

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