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SERIES 65 | FINANCIAL REGULATION COURSES
A Simplified Employee Pension — universally abbreviated SEP and commonly referred to as a SEP-IRA — is an employer-sponsored retirement plan structure codified under Internal Revenue Code Section 408(k) that allows employers — including self-employed individuals operating as their own employers — to make tax-deductible contributions to individual retirement accounts established in each eligible employee's name, providing the high contribution limits and flexible funding characteristics of an employer-sponsored plan combined with the simplicity, low administrative cost, and investment flexibility of an individual retirement account.
The SEP was designed specifically for small businesses and self-employed individuals who want to provide meaningful retirement benefits without the administrative complexity, mandatory annual contribution requirements, and plan qualification formalities of a 401(k) or defined benefit pension plan. The SEP is the most widely used retirement savings vehicle for self-employed professionals, sole proprietors, partnerships, S corporations, and other small business structures precisely because it combines the highest available contribution limits of any IRA-based vehicle with the minimum possible administrative burden — there is no Form 5500 annual reporting requirement, no plan testing for discrimination, and no mandatory contribution in any year when business conditions do not permit funding. The SEP is tested on the Series 65 examination in the context of retirement planning, small business retirement vehicles, contribution limits, and the comparison of retirement plan alternatives for self-employed clients.
Internal Revenue Code Section 408(k) establishes the SEP as a specific category of individual retirement account that receives contributions from an employer under a written arrangement meeting specified requirements. The Treasury regulations implementing Section 408(k) are codified at 26 CFR Part 1, Section 1.408-7, and the IRS provides model SEP documentation through Form 5305-SEP — the Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement — which allows employers to establish a SEP using a standardised IRS-approved written agreement without the need for an individually designed plan document and its associated legal review costs.
The SEP structure differs from a conventional employer-sponsored qualified plan under IRC Section 401(a) in a fundamental organisational respect — rather than establishing a single trust holding all participants' assets, the SEP directs each employer contribution into a separate traditional IRA established and maintained in each eligible employee's individual name. These individual IRAs are conventional traditional IRAs for all purposes except the higher contribution limit that the SEP arrangement permits — they are owned, managed, and controlled by each employee individually, can be invested in the full range of IRA-permissible investments, and are fully portable when the employee leaves the employer because they were always the employee's own individual accounts rather than plan accounts that must be processed through a distribution and rollover.
Any employer — sole proprietors, partnerships, corporations including S corporations and C corporations, limited liability companies taxed as any of the above, tax-exempt organisations, and governmental entities — may establish a SEP and make deductible contributions to employee SEP-IRAs. There is no minimum or maximum business size requirement — a Fortune 500 corporation could theoretically use a SEP, though the absence of 401(k) salary deferral capability and the mandatory proportional contribution requirement make SEPs impractical for large employers with many employees. In practice, the SEP is used predominantly by sole proprietors with no employees other than themselves, partnerships and small professional practices, and small businesses with a modest number of employees.
A self-employed individual who operates as a sole proprietor is simultaneously the employer and the employee for SEP purposes — they establish the SEP as the employer, make contributions on their own behalf as the employee, and deduct those contributions as a business expense on Schedule C of their individual tax return. This self-employed application of the SEP is the most common usage — a freelancer, independent contractor, attorney, physician, consultant, or other self-employed professional who wants to maximise retirement savings without the administrative complexity of a 401(k) plan.
The deadline for both establishing a SEP plan and making the annual contribution is the employer's tax return filing deadline including extensions — for a calendar-year sole proprietor this is April 15 of the following year extended to October 15 with a timely extension request. This extended funding deadline — which allows the employer to determine the contribution amount after the tax year has ended and total compensation figures are known — is a significant practical advantage over qualified plans that must be established by December 31 of the tax year.
When an employer establishes a SEP, it must cover all employees who meet the SEP's eligibility criteria — and cannot discriminate among otherwise eligible employees by selectively excluding individuals or covering only certain job classifications or compensation tiers. The mandatory coverage rules are the primary limitation on SEP use for businesses with multiple employees, because the employer must contribute at the same percentage of compensation for every eligible employee in any year it makes contributions for itself or for any other eligible employee.
Under IRC Section 408(k)(2), an employee must be included in the SEP if they satisfy all three of the following criteria — they have reached age twenty-one, they have performed services for the employer in at least three of the immediately preceding five calendar years, and they have received at least seven hundred and fifty dollars of compensation from the employer during the tax year — a threshold indexed for inflation for 2025 and 2026.
These eligibility criteria represent the maximum restriction an employer may impose — an employer may adopt more generous eligibility criteria by reducing or eliminating any of the three conditions but may not impose more restrictive criteria. An employer that wants all employees to be covered immediately may eliminate the three-year service requirement entirely — covering every employee who meets only the age and compensation thresholds from their first year of employment.
The practical implication of the mandatory proportional contribution requirement is that an employer who contributes a certain percentage of their own compensation to their own SEP-IRA in a given year must contribute that exact same percentage of each eligible employee's compensation to their SEP-IRAs in the same year. An employer who makes no contribution in a year makes no contribution for any employee — there is no requirement to fund the SEP in any particular year, but every year in which a contribution is made must be funded proportionally for all eligible employees. This proportional funding requirement, combined with the absence of vesting schedules — all SEP contributions are immediately and one hundred percent vested — means that small business owners with multiple employees may find the SEP's mandatory employee coverage more costly than a 401(k) plan that permits a vesting schedule and allows the employer to control eligibility more precisely.
The contribution limit is the defining advantage of the SEP relative to a conventional traditional or Roth IRA — the annual contribution limit for a SEP-IRA is dramatically higher than the seven thousand dollar and eight thousand dollar limits applicable to conventional IRA contributions, making the SEP the most powerful tax-deferred savings vehicle available to self-employed individuals.
Under IRC Section 408(k)(3)(C), the annual SEP contribution limit for 2025 is the lesser of twenty-five percent of the employee's compensation or sixty-nine thousand dollars — the dollar limit indexed for inflation under IRC Section 415(d). For 2026, the limit is seventy-two thousand dollars, reflecting the annual cost-of-living adjustment. The compensation used in the twenty-five percent calculation is capped at the annual compensation ceiling under IRC Section 401(a)(17) — three hundred and fifty thousand dollars for 2025 and three hundred and sixty thousand dollars for 2026 — meaning that an employee earning five hundred thousand dollars can receive a SEP contribution based on only three hundred and fifty thousand dollars of compensation, producing a maximum contribution of eighty-seven thousand five hundred dollars but capped at sixty-nine thousand dollars by the dollar limit.
For self-employed individuals — whose contribution calculation is more complex because they are simultaneously the employer making the contribution and the employee receiving it — the effective contribution rate is approximately twenty percent of net self-employment income rather than twenty-five percent. This adjustment arises because the contribution itself reduces the self-employed person's net self-employment income, creating a circular calculation that is resolved algebraically. A self-employed individual with one hundred thousand dollars of net Schedule C income after deducting the deductible portion of self-employment tax can contribute approximately twenty thousand dollars — twenty percent of one hundred thousand dollars — rather than twenty-five thousand dollars, because the contribution reduces the base upon which the percentage is calculated.
Unlike 401(k) plans, which allow employees to make elective salary deferral contributions of their own pre-tax income in addition to employer contributions, the SEP receives only employer contributions — employees may not make their own elective deferrals to a SEP-IRA. This absence of employee elective deferrals means that the SEP's high contribution limit is entirely dependent on the employer choosing to fund the plan each year — employees have no independent ability to increase their own SEP retirement savings beyond the employer's discretionary contribution.
The SEP contribution limit has no catch-up provision — unlike conventional IRAs where individuals age fifty and older may contribute an additional one thousand dollars annually under the catch-up contribution rule, the SEP maximum contribution is the same for all participants regardless of age. This absence of a catch-up contribution is a notable limitation for older self-employed individuals approaching retirement who might otherwise benefit from accelerated pre-retirement savings.
SEP contributions receive the same tax treatment as traditional IRA contributions — they are made with pre-tax dollars, grow tax-deferred within the account, and are fully taxable as ordinary income when withdrawn in retirement.
For employers, SEP contributions are deductible business expenses — sole proprietors deduct SEP contributions on their individual Form 1040, partnerships and S corporations deduct contributions for common-law employees on the entity's return while partners and S corporation shareholders claim their own contributions on their individual returns, and C corporations deduct contributions on Form 1120. The deductibility of contributions reduces the employer's taxable income in the year of contribution — a dollar-for-dollar tax benefit at the employer's marginal rate.
For employees, SEP contributions made by the employer are not included in the employee's gross income in the year contributed — they are excluded from W-2 wages and do not appear on the employee's tax return as income until withdrawn. The entire account balance — both employer contributions and the investment earnings accumulated over the years — is ordinary income when distributed. Distributions before age fifty-nine and a half are subject to the ten percent early withdrawal penalty under IRC Section 72(t) in addition to ordinary income tax, with the same exceptions applicable to traditional IRAs — disability, death, substantially equal periodic payments, and the other enumerated exceptions.
The required minimum distribution rules of IRC Section 401(a)(9) apply to SEP-IRAs exactly as they apply to traditional IRAs — distributions must begin by the required beginning date of April 1 following the year the account owner reaches age seventy-three under the SECURE 2.0 Act framework, with the annual RMD calculated using the IRS Uniform Lifetime Table and the prior December 31 account balance divided by the applicable distribution period.
The selection of the appropriate retirement savings vehicle for a self-employed individual or small business owner is a direct examination topic on the Series 65 — candidates must understand the material differences among the SEP-IRA, the SIMPLE IRA, and the Solo 401(k) to advise clients appropriately.
The SEP-IRA offers the highest potential contribution — up to the lesser of twenty-five percent of compensation or sixty-nine thousand dollars for 2025 — making it the optimal vehicle for highly compensated self-employed individuals who want to maximise pre-tax retirement savings. Its administrative simplicity — Form 5305-SEP with no annual reporting requirements — makes it the lowest-maintenance option. Its principal limitations are the absence of employee elective deferrals, the mandatory proportional coverage requirement for all eligible employees, and the absence of a catch-up contribution for older participants.
The SIMPLE IRA — Savings Incentive Match Plan for Employees — allows employee elective deferrals of up to sixteen thousand dollars for 2025 — with a three thousand five hundred dollar catch-up for age fifty and older — combined with a mandatory employer contribution of either a matching contribution of up to three percent of compensation or a non-elective contribution of two percent of compensation for all eligible employees. The SIMPLE IRA's lower contribution limit compared to the SEP and its mandatory employer matching or non-elective contribution requirement make it appropriate for businesses with employees who want to participate in elective deferrals but are not structured for the higher limits and mandatory proportional contributions of a SEP. A two-year holding period restricts rollover of SIMPLE IRA assets to only another SIMPLE IRA for the first two years of participation.
The Solo 401(k) — also called the Individual 401(k) or Self-Employed 401(k) — is available only to self-employed individuals with no common-law employees other than a spouse. It allows the highest possible contributions for many self-employed individuals because it combines both the employer profit-sharing contribution — up to twenty-five percent of W-2 compensation or approximately twenty percent of net self-employment income — and an employee elective deferral — up to twenty-three thousand dollars for 2025 with a seven thousand five hundred dollar catch-up for age fifty and older — within the same overall limit of sixty-nine thousand dollars for 2025. A self-employed individual with one hundred thousand dollars of net income can contribute approximately forty-three thousand dollars through a Solo 401(k) — the twenty thousand dollar employer profit-sharing component plus the twenty-three thousand dollar employee deferral — compared to approximately twenty thousand dollars through a SEP-IRA. The Solo 401(k) requires more administrative setup than a SEP but offers the additional capacity from employee deferrals that makes it superior for lower-income self-employed individuals who want to maximise contributions.
Because SEP-IRA assets are held in conventional individual retirement accounts — one for each eligible employee — the investment options available within a SEP-IRA are exactly the same as those available in any traditional IRA at the same financial institution. Participants may invest in stocks, bonds, mutual funds, exchange-traded funds, certificates of deposit, Treasury securities, and any other investment permissible for IRA accounts under IRC Section 408 — with the exclusion of life insurance contracts, collectibles, and S corporation stock that are impermissible for all IRAs.
Each eligible employee owns and controls their own individual SEP-IRA account — they may invest the employer's contributions according to their own investment preferences within the investment options offered by the IRA custodian, and they may change those investments at any time without the employer's consent or knowledge. This individual ownership structure means that a SEP-IRA participant who leaves the employer retains complete ownership and control of the account — there is no forfeiture, no vesting schedule, and no administrative distribution process required because the account was always the employee's own IRA.
The Simplified Employee Pension is tested on the Series 65 examination in the context of retirement planning for self-employed individuals and small business owners, contribution limits, eligibility requirements, the comparison to SIMPLE IRAs and Solo 401(k) plans, and the tax treatment of contributions and distributions.
The key points to retain are these.
A Simplified Employee Pension — SEP or SEP-IRA — is an employer-sponsored retirement savings arrangement under IRC Section 408(k) in which employers make tax-deductible contributions to individual traditional IRAs established in each eligible employee's name. It is available to any employer regardless of size — most commonly used by self-employed individuals, sole proprietors, and small businesses. The plan can be established and funded up to the employer's tax return filing deadline including extensions — the latest of any retirement plan type.
Eligible employees who must be covered are those who have reached age twenty-one, have worked for the employer in at least three of the preceding five calendar years, and have received at least seven hundred and fifty dollars of compensation in the tax year — the employer may adopt more generous but not more restrictive criteria. Contributions must be made at the same percentage of compensation for all eligible employees — mandatory proportional coverage with no discrimination permitted. All contributions are immediately one hundred percent vested — no vesting schedule is permitted.
The annual contribution limit is the lesser of twenty-five percent of compensation or sixty-nine thousand dollars for 2025 — seventy-two thousand dollars for 2026 — with compensation capped at three hundred and fifty thousand dollars for 2025 under IRC Section 401(a)(17). For self-employed individuals the effective contribution rate is approximately twenty percent of net self-employment income due to the circular deduction calculation. There is no catch-up contribution for participants age fifty or older — unlike conventional IRAs. Only employer contributions are permitted — employees may not make elective deferrals to a SEP-IRA. Contributions are pre-tax — deductible by the employer and excluded from employee income until withdrawn — and all distributions are ordinary income subject to the ten percent early withdrawal penalty under IRC Section 72(t) before age fifty-nine and a half. SEP-IRAs are subject to required minimum distribution rules under IRC Section 401(a)(9) beginning at age seventy-three under the SECURE 2.0 Act framework. For self-employed individuals wanting to maximise contributions, the Solo 401(k) often allows higher total contributions at lower income levels because it combines employer profit-sharing contributions with employee elective deferrals within the same overall limit.
