Simplified Employee Pension (SEP) | First State Financial Management

Simplified Employee Pension Plans (SEPs)

Looking for a retirement plan that’s easy to set up, flexible to fund, and generous in its contribution limits? A Simplified Employee Pension (SEP) plan might be the perfect fit. At First State Financial Management, we help small business owners and self-employed individuals unlock the power of SEP-IRAs to build wealth and reward employees.

What is a SEP?

A SEP is a retirement plan that allows employers to make tax-deductible contributions to traditional IRAs (called SEP-IRAs) for themselves and eligible employees. Contributions grow tax-deferred and are excluded from employees’ taxable income until withdrawal.

Whether you're a sole proprietor, LLC, partnership, or corporation, SEPs offer a streamlined way to save for retirement—without the administrative burden of more complex plans.

How to Set Up a SEP:

You can establish and fund your SEP up until your business’s tax filing deadline—including extensions. That means self-employed individuals may have until October 15 to contribute for the prior tax year.

Use IRS Form 5305-SEP.

Adopt a prepackaged plan from a financial institution.

Create a custom-designed plan with professional guidance.

Advantages & Considerations

Advantages

Flexible Funding: You choose whether to contribute each year
High Limits: SEP contributions rival those of qualified plans
Minimal Reporting: No annual IRS filings if using Form 5305-SEP
No Fiduciary Burden: Employees manage their own SEP-IRAs
IRA Compatibility: Employees can still contribute to separate IRAs
Tax Credits Available: Thanks to the SECURE Act 2.0, small employers may qualify for startup and contribution tax credits

Considerations

All eligible employees must be included
Contributions vest immediately—no gradual ownership
Employees must set up or modify IRAs to accept SEP contributions
May not be ideal for businesses with high turnover or long-term retention goals

Things to Keep in Mind:

Who Can Set Up a SEP?

You can establish a SEP if you:

Own a business or have self-employment income
Operate as a sole proprietor, partnership, LLC, S corp, or C corp
Have no employees or want to include eligible employees in your plan

Eligible employees must:

Be age 21 or older
Have worked for you in at least 3 of the last 5 years
Earn at least $750 in compensation in 2025

Contribution Limits for 2025

Employer Contribution: Up to 25% of compensation or $70,000 (whichever is less)
Compensation Cap: First $350,000 of compensation considered
Self-Employed Contribution: Effectively capped at 20% of net earnings.
Employees cannot contribute pre-tax dollars to SEP-IRAs, but they can make regular IRA contributions (up to $7,000, or $8,000 if age 50+).