They are typically favored by small business owners because they do not incur as many start-ups and operating costs as a traditional IRA plan would. They also have more favorable eligibility requirements such as a minimum age of 21 and $600 compensation minimum. And if that weren’t already attractive enough, employers are allowed to skip contributions during years when the business is down.
Who is Responsible for the Investment Decisions?
The investment decisions are not made by the employer, rather they are made by the IRA trustee. The IRA trustee determines eligible investments and the employee account owner then makes specific investments. The trustee also handles the admin responsibilities such as sending annual statements, depositing contributions, and filing all required documents with the IRS.
Is There a Limit to How Much Can Be Invested?
Yes. For the year 2020, employer contributions cannot exceed 25% of an employee’s compensation or $57,000. Whichever of the two is lesser. It is also worth pointing out that since the funding vehicle for a SEP IRA is a traditional IRA, contributions made to the SEP plan become traditional IRA assets and are treated with the same rules and regulations. These include Distribution rules, Investment rules, Contribution rules, and Documentation requirements.
