Simplified Employee Pension Benefits

A simplified employee pension, or SEP, is the simplest, most efficient, and least expensive way for a small business to establish a pension (defined benefit plan) plan for its owners and employees.

What is a SEP? SEPs are essentially individual retirement accounts (or IRAs) in that they still act in many respects like pension plans but are much easier and less expensive to administer.

While the "S" in "SEP" stands for "simplified," if you have employees, the process of creating and administering a SEP is not all that simple. If you're interested in establishing a retirement plan, you must consult your financial and legal advisors about how to create and administer the plan. This discussion is designed to acquaint you with some of the major steps in creating and administering a SEP.

Business Tools

A sample SEP is available in the Business Tools area.

Who should set up a SEP? If you fall into one of these categories, you should consider setting up a SEP:

Who shouldn't set up a SEP? You should stay away from SEPs if you:

Setting up a SEP. To set up a SEP, you need to take three steps, which are, in order:

  1. Determine your contributions allocation formula.
  2. Establish IRAs for all your eligible employees.
  3. Complete all blanks on IRS Form 5305-SEP (or create your own document with similar information in it), and sign and date it.


If you decide to create a SEP, make joining it a condition of employment for all employees. Otherwise, an employee who chooses not to participate could create adverse tax consequences for those who do participate.

Administration. There are also many administrative issues involved in offering a SEP, including: