A Simplified Employee Pension (SEP) plan is established when an employer adopts a SEP agreement and has a minimum number of employees working in the organization who qualify for owning a SEP-IRA account. The qualification criteria for an employee to become eligible for the employers SEP-IRA plan include:
1. The employee must be at least 21 years of age.
2. The employee must have worked for the employer for a minimum of three years in the last five consecutive years.
3. The employee must have earned at least $450 in compensation for that tax year.
Hence, a SEP can be established if an organization has a certain minimum number of employees fulfilling the above criteria and the employer agrees to adopt a SEP agreement. There are three basic steps in setting up a SEP account and all of those must be fulfilled.
1. For setting up a SEP-IRA account, a legally valid written agreement should be executed. This agreement has to conform to an Internal Revenue Service (IRS) specimen SEP using Form 5305-SEP, Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement. A prototype SEP that was earlier approved by the IRS may also...
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