SEP-240px-491870317A simplified employee pension (SEP) is a good way to start securing a small business owner’s retirement, and the business can gain tax advantages right away. An added advantage is that setting it up and maintaining it is not very difficult.

SEP Basics

The SEP is mainly intended for self-employed people, including sole proprietors, partners, and LLC members. It is a stripped-down retirement plan that can also work for small corporate employers.

The way it works is that if you’re self-employed, you can make an annual contribution of up to 20 percent of your income to a SEP account. This amount is deductible.

If you’re employed by an S or C corporation, the company must set up the SEP for you. Then the corporation can contribute up to 25 percent of your salary to your SEP account. This amount is also deductible.

For 2015, the maximum possible contribution to any participant’s SEP account is $53,000 .

Advantages and Disadvantages

Advantages: A SEP can be set up at just about any bank or brokerage firm. There’s a basic form to fill out and that’s about it. The SEP can even be established as late as the due date for federal income tax returns for the year the first deductible contribution will be made.

Say you are a sole proprietor. You have extended your 2015 individual tax return as long as possible, to October 15, 2016. You can wait until that date to start your 2015 SEP, and as long as you make your initial contribution by then, you can still deduct it on the 2015 tax return.

If your business is a calendar-year corporation, the 2015 corporate return can be extended September 15, 2016. The corporation has until that date to establish the SEP and make the initial contribution.

Another advantage is that there is a generous annual deductible contribution allowed for a SEP. The maximum for 2015 is $53,000. Of course, if the business’ cash is tight there is the option to contribute less than the maximum, or nothing at all.

Once your SEP is up and running, there are very few administrative details to worry about. The government doesn’t currently require any annual filings for SEPs, as it does for some other types of retirement plans.

Disadvantages: A larger annual deductible contribution may be allowed, depending on age and income, with a different retirement plan, such as a 401(k), a SIMPLE IRA, or a defined benefit pension plan.

Generally, business owners with employees are required to make contributions if they have worked for the company for at least three of the past five years. These contributions are deductible. And, all contributions to employee SEP accounts vest immediately, so an employee can quit at any time without losing any SEP money. That’s good for the employee, but could be difficult for the small business owner if there are more than a few trusted staff members.

Another disadvantage is that borrowing from a SEP account is prohibited, but is allowed under most other types of retirement plans.


If a small business owner is looking for maximum simplicity from a tax-favored retirement plan, a SEP may be the best choice. Obviously that is assuming covering their employees is not a problem for the business owner. A SEP is the only choice if you want to make a deductible contribution for last year, even though no plan was actually in existence at the end of last year. Contact Filler & Associates to learn more about SEPs or to hear about other retirement plan alternatives for your Maine-based small business.