Simplified Employee Pension (sep)

Definition of "Simplified employee pension (sep)"

Employee individual retirement account funded by an employer or a self-employed person. (Also known as SEP-IRA.) Differs from a pension plan in that contributions are immediately vested and employees have control of the investment of the SEP-IRA. IRS rules require that SEP-IRA contributions be made according to a written allocation formula. The maximum contribution is 15% of compensation or $30,000, whichever is less. Employees may elect to take cash instead of their SEP-IRA contribution but must pay income taxes on it. The tax reform act of 1986 also allows a SEP-IRA to be used as an alternative to a section 401 (k) plan (salary reduction plan) for an employer with 25 or fewer employees. The maximum annual contribution limit per employee for such salary-reduction SEP-IRAs is $7000.


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