Simplified Employee Pension Plans Flashcards
(20 cards)
What does SEP stand for?
Simplified Employee Pension Plan
Is a SEP a qualified plan?
No, but it shares many characteristics with qualified plans
What type of account is used for SEP contributions?
Traditional IRA accounts for employees.
Who can establish a SEP?
Any employer, including self-employed individuals.
What are the minimum eligibility requirements for SEP participation?
Age 21 or older
Employed for 3 of the last 5 years
Received at least $750 in compensation during the year (2025)
Can employers use more restrictive eligibility requirements?
No, but they can use less restrictive requirements.
Who makes SEP contributions?
Only the employer; employees cannot contribute directly.
To what account are SEP contributions made?
The employee’s Traditional IRA.
What is the 2025 SEP contribution limit?
The lesser of 25% of covered compensation or $70,000
Are SEP contributions required every year?
No, employer contributions are discretionary.
How do self-employed individuals calculate their SEP contribution?
Start with net earnings from self-employment
Subtract half of self-employment tax
Apply the reduced contribution rate:
Self-employed contribution rate=Contribution Rate/(1+Contribution rate)
(e.g., for 25%: 25% / 1.25 = 20%)
Why is the self-employed SEP contribution rate lower than for employees?
Because contributions reduce net earnings, so a circular calculation is required
What is the vesting schedule for SEP contributions?
100% immediate vesting.
How are SEP withdrawals taxed?
As ordinary income, following IRA rules.
What is the penalty for early SEP withdrawals?
10% penalty before age 59½, unless an exception applies.
Who determines the SEP contribution amount each year?
The employer
Can SEPs be established late in the tax year?
Yes, up to the extended due date of the employer’s tax return
Are SEP contributions subject to the IRA annual contribution limit?
No, employer SEP contributions do not count toward the individual’s IRA contribution limit
Can employees make their own IRA contributions to their SEP IRA?
Yes, but these count toward the regular IRA contribution limit ($7,000, or $8,000 if age 50+ in 2025)
What are the most testable SEP facts for the CFP exam?
Employer-funded only, up to 25% of compensation or $70,000 (2025)
Immediate 100% vesting
Follows IRA tax and penalty rules
Special calculation for self-employed contributions
Flexible setup (can establish up to tax return due date)
