The SEP rules permit you to contribute a limited amount of money each year to each employee's SEP-IRA. If you are self-employed, you can contribute to your own SEP-IRA. Contributions must be in the form of money (cash, check, or money order). You cannot contribute property. However, participants may be able to transfer or roll over certain property from one retirement plan to another. See Publication 590 for more information about rollovers.
You do not have to make contributions every year. But if you make contributions, they must be based on a written allocation formula and must not discriminate in favor of highly compensated employees (defined in chapter 1). When you contribute, you must contribute to the SEP-IRAs of all participants who actually performed personal services during the year for which the contributions are made, including employees who die or terminate employment before the contributions are made.
Contributions are deductible within limits, as discussed later, and generally are not taxable to the plan participants.
A SEP-IRA cannot be a Roth IRA. Employer contributions to a SEP-IRA will not affect the amount an individual can contribute to a Roth or traditional IRA.taxmap/pubs/p560-003.htm#en_us_publink10008829
To deduct contributions for a year, you must make the contributions by the due date (including extensions) of your tax return for the year.taxmap/pubs/p560-003.htm#en_us_publink10008830
Contributions you make for 2008 to a common-law employee's SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $46,000 ($49,000 for 2009). Compensation generally does not include your contributions to the SEP. The SEP plan document will specify how the employer contribution is determined and how it will be allocated to participants.taxmap/pubs/p560-003.htm#en_us_publink10008831
Your employee, Mary Plant, earned $21,000 for 2008. The maximum contribution you can make to her SEP-IRA is $5,250 (25% x $21,000).taxmap/pubs/p560-003.htm#en_us_publink10008832
The annual limits on your contributions to a common-law employee's SEP-IRA also apply to contributions you make to your own SEP-IRA. However, special rules apply when figuring your maximum deductible contribution. See Deduction Limit for Self-Employed Individuals, later.taxmap/pubs/p560-003.htm#en_us_publink10008833
You cannot consider the part of an employee's compensation over $230,000 when figuring your contribution limit for that employee. However, $46,000 is the maximum contribution for an eligible employee. These limits increase to $245,000 and $49,000, respectively, in 2009.taxmap/pubs/p560-003.htm#en_us_publink10008834
Your employee, Susan Green, earned $210,000 for 2008. Because of the maximum contribution limit for 2008, you can only contribute $46,000 to her SEP-IRA.taxmap/pubs/p560-003.htm#en_us_publink10008835
If you contribute to a defined contribution plan (defined in chapter 4), annual additions to an account are limited to the lesser of $46,000 or 100% of the participant's compensation. When you figure this limit, you must add your contributions to all defined contribution plans. Because a SEP is considered a defined contribution plan for this limit, your contributions to a SEP must be added to your contributions to other defined contribution plans.taxmap/pubs/p560-003.htm#en_us_publink10008836
Excess contributions are your contributions to an employee's SEP-IRA (or to your own SEP-IRA) for 2008 that exceed the lesser of the following amounts.
- 25% of the employee's compensation (or, for you, 20% of your net earnings from self-employment).
- $46,000 ($49,000 in 2009).
Excess contributions are included in the employee's income for the year and are treated as contributions by the employee to his or her SEP-IRA. For more information on employee tax treatment of excess contributions, see chapter 1 in Publication 590.
Do not include SEP contributions on your employee's Form W-2 unless contributions were made under a salary reduction arrangement (discussed later).