Employer-offered Simplified Employee Pension (SEP) Plans: How to stay in compliance

Many small business owners establish a Simplified Employee Pension (SEP) plan as a retirement savings vehicle for themselves and, if qualified, their employees. We often think of these plans to be simple to implement and adhere to regulatory standards, because that’s how they are designed to operate.  However, being out of compliance can be very costly, so business owners who organize an SEP plan should adhere to the following best practices:

  • Obtain an SEP plan document from the investment provider (or have one from the IRS-allowed prototypes).  The document has to be signed by a responsible officer of the company.
  • Provide an annual SEP plan documents to all employees.
  • Review potential for any related-party businesses that would create a controlled group or affiliated services group situation.
  • Make sure all qualifying employees are in the contribution computation and contributions are funded in a timely manner.  Employees qualify fora SEP plan contribution if they:
    • Are 21 years or older;
    • Have performed services during at least three of the immediately preceding five years; and,
    • Have received compensation equal to or more than the SEP compensation limit for the year (currently $650 for 2021).

Should your SEP plan come under scrutiny from the IRS Plan unit, there are remedies to fix SEP plans that are out of compliance.  Please contact your ShindelRock tax professional for more information about SEP plans and the regulatory guidelines that govern them.