Publication 560 - Retirement Plans For Small Business

Useful Items

Schedule SE (Form 1040), Self-Employment

Setting Up a SEP

Tax, before subtracting any contributions made

You may want to see:

to the SIMPLE IRA plan for yourself.

There are three basic steps in setting up a SEP.

Publication

Participant. A participant is an eligible em-

1) You must execute a formal written agree-

590

Individual Retirement Arrangements

ployee who is covered by your retirement plan.

ment to provide benefits to all eligible em-

(IRAs)

See the discussions of the different types of

ployees.

plans for the definition of an employee eligible to

Forms (and Instructions)

2) You must give each eligible employee cer-

participate in each type of plan.

tain information about the SEP.

W – 2 Wage and Tax Statement

3) A SEP-IRA must be set up by or for each

Partner. A partner is an individual who shares

1040 U.S. Individual Income Tax Return

eligible employee.

ownership of an unincorporated trade or busi-

5305 – SEP Simplified Employee

ness with one or more persons. For retirement

Many financial institutions will help you

Pension-Individual Retirement

plans, a partner is treated as an employee of the

TIP

set up a SEP.

Accounts Contribution Agreement

partnership.

5305A – SEP Salary Reduction and

Other Elective Simplified Employee

Self-employed individual. An individual in

Formal written agreement. You must exe-

Pension-Individual Retirement

business for himself or herself is self-employed.

cute a formal written agreement to provide ben-

Accounts Contribution Agreement

Sole proprietors and partners are self-em-

efits to all eligible employees under a SEP. You

ployed. Self-employment can include part-time

can satisfy the written agreement requirement

A simplified employee pension (SEP) is a writ-

work.

by adopting an IRS model SEP using Form

ten plan that allows you to make contributions

Not everyone who has net earnings from

5305 – SEP. However, see When not to use

toward your own retirement (if you are self-em-

self-employment for social security tax purposes

Form 5305 – SEP, later.

ployed) and your employees’ retirement without

is self-employed for qualified plan purposes.

If you adopt an IRS model SEP using Form

getting involved in a more complex qualified

See Common-law employee, earlier. Also see

5305 – SEP, no prior IRS approval or determina-

plan.

Net earnings from self-employment.

tion letter is required. Keep the original form. Do

Under a SEP, you make the contributions to

not file it with the IRS. Also, using Form

In addition, certain fishermen may be consid-

5305 – SEP will usually relieve you from filing

a traditional individual retirement arrangement

ered self-employed for setting up a qualified

annual retirement plan information returns with

(called a SEP-IRA) set up by or for each eligible

plan. See Publication 595, Tax Highlights for

the IRS and the Department of Labor. See the

employee. A SEP-IRA is owned and controlled

Commercial Fishermen, for the special rules

Form 5305 – SEP instructions for details.

by the employee, and you make contributions to

used to determine whether fishermen are

the financial institution where the SEP-IRA is

self-employed.

When not to use Form 5305 – SEP. You

maintained.

cannot use Form 5305 – SEP if any of the follow-

ing apply.

SEP-IRAs are set up for, at a minimum, each

Sole proprietor. A sole proprietor is an indi-

eligible employee (defined later). A SEP-IRA

vidual who owns an unincorporated business by

1) You currently maintain any other qualified

may have to be set up for a leased employee

himself or herself. For retirement plans, a sole

retirement plan. This does not prevent you

proprietor is treated as both an employer and an

(defined in chapter 1), but does not need to be

from maintaining another SEP.

employee.

set up for excludable employees (defined later).

2) You have any eligible employees for whom

IRAs have not been set up.

Eligible employee. An eligible employee is an

3) You use the services of leased employees

individual who meets all the following require-

(as described in chapter 1).

ments.

4) You are a member of any of the following

•

Has reached age 21.

unless all eligible employees of all the

•

members of these groups, trades, or busi-

Has worked for you in at least 3 of the last

nesses participate under the SEP.

5 years.

•

a) An affiliated service group described in

Has received at least $450 in compensa-

Simplified

section 414(m).

tion from you for 2001.

b) A controlled group of corporations de-

Employee

scribed in section 414(b).

You can use less restrictive partici-

TIP

pation requirements than those listed,

c) Trades or businesses under common

Pension (SEP)

but not more restrictive ones.

control described in section 414(c).

5) You do not pay the cost of the SEP contri-

butions.

Excludable employees. The following em-

Topics

ployees can be excluded from coverage under a

This chapter discusses:

SEP.

Information you must give to employees.

You must give each eligible employee a copy of

•

Employees covered by a union agreement

Setting up a SEP

Form 5305 – SEP, its instructions, and the other

and whose retirement benefits were bar-

•

information listed in the Form 5305 – SEP in-

How much to contribute

gained for in good faith by the employees’

structions. An IRS model SEP is not considered

•

Deducting contributions

union and you.

adopted until you give each employee this infor-

•

mation.

Salary reduction simplified employee pen-

Nonresident alien employees who have

sions (SARSEPs)

received no U.S. source wages, salaries,

Setting up the employee’s SEP-IRA. A

•

or other personal services compensation

Distributions (withdrawals)

SEP-IRA must be set up by or for each eligible

from you. For more information about non-

employee. SEP-IRAs can be set up with banks,

•

Additional taxes

resident aliens, see Publication 519, U.S.

insurance companies, or other qualified finan-

•

Reporting and disclosure requirements

Tax Guide for Aliens.

cial institutions. You send SEP contributions to

Page 6

Chapter 2 Simplified Employee Pension (SEP)

Publication 560 - Retirement Plans For Small Business - 2001 Page 6

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