IRS SEP Contribution Limit
A simplified employee pension plan -- SEP -- is set up by an employer. The employer funds the plan by making deposits into IRA accounts for all of the company's employees. All contributions to SEP IRAs must be made by the employer. Employees are not allowed to make salary deferrals into a SEP plan.
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Contribution Limits
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The IRS contribution limit into a SEP IRA is 25 percent of an employee's annual salary. For example, if the employee earns $40,000 per year, the employer can deposit up to $10,000 into a SEP IRA for that employee. The maximum contribution amount per individual employee for 2010 and 2011 is $49,000. According to the IRS website, this maximum is subject to cost-of-living increases in later years.
Contribution Level
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An employer who makes SEP contributions must make the same percentage level contribution for all employees. If the employer wants to deposit the maximum 25 percent of salary, every employee will have 25 percent of his salary deposited into a SEP IRA account. The employer can elect each year how much of a contribution to make to the SEP accounts, from zero percent up to the 25 percent maximum.
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Considerations
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A simplified employee pension plan can make sense for a business with a small number of employees. As the name implies, a SEP is simple to set up and has low maintenance costs. Deposits go into individual IRA accounts for each employee. Depositing the maximum 25 percent of salary contribution would be expensive for a large number of employees, and the owners of the company would receive only the portion that goes into their own IRA accounts.
Self-Employed
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A SEP plan can be attractive for a self-employed individual. The simple setup and large contribution limit provide a significant tax deduction for the self-employed business person. The contribution amount for a self-employed person has additional restrictions. The income amount that can be used to calculate the contribution maximum is adjusted by half of the self-employment tax contribution and the SEP contribution. The result is that a self-employed individual is limited to a SEP contribution of approximately 20 percent of earnings. The $49,000 maximum also applies.
Publications and Forms
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IRS information about SEP plans are included in Publication 560: Retirement Plans for Small Business. The publication is especially important for self-employed individuals taking a deduction for SEP contributions. The actual calculation of the maximum SEP contribution is a multistep process, and Publication 560 includes the required forms and tables.
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References
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