However, there are also some important differences. While 401(k) plans are funded with the pre-tax compensation from employees (sometimes supplemented with a full or partial match by the employer), all contributions made to a SEP must come from the employer on behalf of the employees.
An employer could make an annual contribution of up to the lesser of 25%1 of each employee’s compensation2 or $58,000 (whichever is less) for 2021 and $61,000 for 2022.
Here are several other key facts to know about a SEP for small business owners:
- If the employer makes contributions on their own behalf, they must also make contributions on behalf of all eligible employees.
- Employees are always 100% vested in (or, have ownership of) all SEP-IRA money.
- The employer can adjust the contribution each year as the situation warrants.
- Any employees who are at least age 21 years old and worked for you at any time in three out of the prior five years must be included in the SEP plan.
- For instance, someone who worked for you in 2017, 2018 and 2020 would be eligible for your plan, and you would be required to make a contribution for him or her for the 2021 plan year.
- If you want to stash away 15% of your compensation for yourself, you must also contribute an amount equal to 15% of that employee’s compensation to his or her SEP IRA. Although the contribution comes directly from the company rather than from the employee’s wages, the employees own and control their own accounts.
- If you are an employee with a SEP IRA account, you can:
- Keep your money in the SEP IRA
- Transfer your money to a Traditional IRA, Roth IRA (this is a taxable event), or another SEP IRA
- Roll over your money to another SEP IRA, a 401(k), a 403(b) or 457(b) account in which you participate if the receiving plan accepts rollovers.