What is a SEP plan?
A SEP plan is an employer-sponsored retirement plan that uses SEP-IRAs as the retirement accounts. The employer makes contributions into each eligible person’s SEP-IRA.
Unlike many workplace plans, SEP contributions are not required every year. Employers can decide whether to contribute based on business cash flow and other priorities, within IRS guidelines.
Who is a SEP plan for?
A SEP plan is often a fit for:
- Self-employed individuals
- Sole proprietors
- Small businesses
- Businesses that want a retirement plan with fewer administrative steps
It can also be a consideration for business owners who want a plan that may support larger contributions than some simpler retirement options, depending on income and business structure.
How do SEP contributions work?
In a SEP plan:
- Only the employer contributes (employees do not contribute through payroll deferrals)
- Contributions are typically based on a percentage of compensation
- The employer must follow IRS rules for who is eligible
- If employees are eligible, contributions generally need to be made consistently for the group (following plan rules)
Because SEP contribution decisions can vary year to year, many business owners like the flexibility. The right approach depends on the business, goals, and team structure.
What are the potential benefits of a SEP plan?
A SEP may offer benefits such as:
- Simpler administration compared to some other employer plans
- Flexible contributions (employers can contribute more in strong years and less in lean years)
- The potential for higher contribution limits than traditional IRAs, depending on IRS rules
A SEP is not “best” for everyone, but it can be a practical tool when it aligns with business goals and employee needs.