Establishing a SEP IRA Plan
As with any tax procedure, there are certain actions
which must be taken in order for any business, including
a one person business, to establish a Simplified
Employee Pension Plan (SEP). If not properly established,
the expected tax benefits will not be realized.
What must be done by the business?
First, there must be written plan agreement. Most
businesses will choose to complete and execute the IRA
model Form 5305-SEP, Simplified Employee Pension–
Individual Retirement Accounts contribution Agreement.
A business may set up its SEP for a year (e.g. 2016) as
late as the due date including extensions for the tax
year. So, a business may establish a SEP for 2016 on June 20, 2017, if it has an extension for its 2016 tax
The maximum contribution for 2016 is the lesser of
25% of a person’s qualifying compensation or $53,000.
Second, provide certain information to each employee,
if any. If no employees, then this information is not
furnished. If there are employees, in general, they will
be furnished a copy of the Form 5305-SEP and its
What must be done by each individual?
Third, each eligible employee, including the individual
who is the sole proprietor or sole shareholder, must
establish a SEP-IRA. A SEP-IRA is a standard traditional
IRA to which a SEP contribution has been or will be
made. See the standard traditional IRA application. The
tax laws do not require a person who has an existing
traditional IRA to set up a new SEP-IRA. Some financial
institutions choose for administrative reasons to require
a separate IRA, but the tax laws do not require it. If any
employee would fail to have a SEP-IRA so the business
did not make a SEP contribution for such employee,
there would be no SEP and the expected tax benefits
would not apply for the sponsoring business and other
In summary, establishing a SEP is easy as long as the
two steps above are completed for a one person business
and the three steps are completed for a business
with employees. Set forth are the rules we think are
most important for an IRA custodian to follow in preparing
the 2016 Form 1099-R.