SEP Plan Agreement: Everything You Need to Know

A Simplified Employee Pension (SEP) plan is a type of retirement plan that is designed to help small-business owners and self-employed individuals set aside tax-deferred retirement savings for themselves and their employees. An SEP plan agreement is a crucial document that outlines the terms and conditions of the plan. In this article, we will discuss everything you need to know about the SEP plan agreement.

What is an SEP Plan Agreement?

An SEP plan agreement is a legal document that outlines the terms and conditions of the SEP plan. It is a critical document that establishes the rules that govern the plan, including the eligibility requirements, contribution limits, and vesting schedules.

The IRS provides a model SEP plan agreement that a business can use, or it can create a customized document that meets its needs. However, the agreement must meet specific IRS requirements to qualify as an SEP plan.

Eligibility Requirements

An SEP plan agreement must specify the eligibility requirements for employees to participate in the plan. Generally, all employees who are at least 21 years old, have worked for the employer for three of the last five years, and have earned at least $600 in the current year are eligible to participate in the plan.

However, an employer can use less restrictive eligibility requirements, such as allowing employees to participate immediately upon hire or lowering the age or service requirements.

Contribution Limits

An SEP plan agreement must also specify the contribution limits for the plan. The employer is responsible for funding the plan, and the contributions are tax-deductible for the employer. The maximum contribution limit is the lesser of 25% of the employee`s compensation or $58,000 in 2021.

Vesting Schedules

An SEP plan agreement must also specify the vesting schedules for the contributions made to the plan. Vesting is the process by which an employee gains ownership of the contributions made to their account. The employer can choose a vesting schedule that ranges from immediate vesting to a six-year graduated vesting schedule.

Amending an SEP Plan Agreement

An SEP plan agreement can be amended at any time, provided that the amendments meet specific IRS requirements. The IRS requires that plan amendments must be in writing, be adopted before the end of the plan year in which they are effective, and be communicated to all eligible employees.

Final Thoughts

An SEP plan can be an excellent retirement savings tool for small-business owners and self-employed individuals. An SEP plan agreement is a critical document that outlines the terms and conditions of the plan, including the eligibility requirements, contribution limits, and vesting schedules. Employers must ensure that their plan agreement meets specific IRS requirements to remain compliant and avoid any penalties or fines.