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Simple English definitions for legal terms
SEP
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A quick definition of SEP:
SEP: A type of retirement savings plan for employees that allows employers to contribute money to their employees' accounts. Employers have the flexibility to limit contributions when business is bad, but must contribute at the same rate for all employees. Only employers can establish and contribute to a SEP-IRA. Contributions are tax deductible and the annual contribution limits are higher than other IRAs, up to $58,000 in 2021.
A more thorough explanation:
A Simplified Employee Pension Plan (SEP) is a type of retirement savings plan that allows employers to contribute to their employees' retirement accounts. SEP-IRA is another name for this type of plan. It is more flexible than a traditional IRA account because employers have the option to limit contributions when business is bad. Only employers can establish and contribute to a SEP-IRA, and they must do so at the same rate for all employees.
For example, if an employer decides to contribute 10% of an employee's salary to their SEP-IRA, they must contribute the same percentage to all employees who are eligible for the plan. An employer's contributions to a SEP-IRA remain tax-deductible like other IRAs, and the plan has low maintenance costs.
The annual contribution limits for a SEP-IRA are much higher than other IRAs. An employer can contribute up to the lesser of 25% of the employee's wages or the annual cap, which is $58,000 as of 2021. This means that if an employee earns $100,000 per year, their employer can contribute up to $25,000 to their SEP-IRA.
Overall, a SEP-IRA is a great option for employers who want to provide retirement benefits to their employees while maintaining flexibility in their contributions.