A SEP is a written plan that allows you to make contributions toward your own retirement and your employees' retirement without getting involved in a more complex qualified plan.

Under a SEP, you make the contributions to a traditional individual retirement arrangement (called a SEP-IRA) set up by or for each eligible employee. A SEP-IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP-IRA is maintained.

SEP-IRAs are set up for, at a minimum, each eligible employee (defined below). A SEP-IRA may have to be set up for a leased employee (defined in chapter 1), but does not need to be set up for excludable employees (defined later).

An eligible employee is an individual who meets all the following requirements.

• Has reached age 21.
• Has worked for you in at least 3 of the last 5 years.
• Has received at least $550 in compensation from you in 2009. This amount remains the same in 2010.

The following employees can be excluded from coverage under a SEP.

• Employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you.
• Nonresident alien employees who have received no U.S. source wages, salaries, or other personal services compensation from you. For more information about nonresident aliens, see Publication 519, U.S. Tax Guide for Aliens.

There are three basic steps in setting up a SEP.

1. You must execute a formal written agreement to provide benefits to all eligible employees.
2. You must give each eligible employee certain information about the SEP.
3. A SEP-IRA must be set up by or for each eligible employee.

You must execute a formal written agreement to provide benefits to all eligible employees under a SEP. You can satisfy the written agreement requirement by adopting an IRS model SEP using Form 5305-SEP. However, see When not to use Form 5305-SEP, below.

If you adopt an IRS model SEP using Form 5305-SEP, no prior IRS approval or determination letter is required. Keep the original form. Do not file it with the IRS. Also, using Form 5305-SEP will usually relieve you from filing annual retirement plan information returns with the IRS and the Department of Labor. See the Form 5305-SEP instructions for details. If you choose not to use Form 5305-SEP, you should seek professional advice in adopting a SEP.

You cannot use Form 5305-SEP if any of the following apply.

1. You currently maintain any other qualified retirement plan other than another SEP.
2. You have any eligible employees for whom IRAs have not been set up.
3. You use the services of leased employees, who are not your common-law employees (as described in chapter 1).
4. You are a member of any of the following unless all eligible employees of all the members of these groups, trades, or businesses participate under the SEP.
   1. An affiliated service group described in section 414(m).
   2. A controlled group of corporations described in section 414(b).
   3. Trades or businesses under common control described in section 414(c).
5. You do not pay the cost of the SEP contributions.

You must give each eligible employee a copy of Form 5305-SEP, its instructions, and the other information listed in the Form 5305-SEP instructions. An IRS model SEP is not considered adopted until you give each employee this information.

A SEP-IRA must be set up by or for each eligible employee. SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. You send SEP contributions to the financial institution where the SEP-IRA is maintained.

You can set up a SEP for any year as late as the due date (including extensions) of your income tax return for that year.

You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP that first became effective in 2009. For more information, see Credit for startup costs under Reminders, earlier.