Print Friendly Version Print Friendly Version

Forms of SEP plan documents and when to use them

“I have a client that would like to establish a SEP plan. What document options are available and what are the considerations for selection?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans, including nonqualified plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from New York is representative of a common inquiry related simplified employee pension (SEP) plans.

Highlights of Discussion

Employers that sponsor SEP plans must maintain them pursuant to a written document [Internal Revenue Code Section (IRC §) 408(k)(5). There are three document format options for SEP plans: 1) the IRS model form, which is IRS Form 5305-SEP Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement; a prototype document offered by banks, insurance companies, mutual fund companies and other qualified financial institutions or forms providers; or 3) individually designed documents, which are typically written by attorneys. There are several considerations when selecting a SEP plan document including, but not limited to, cost, whether the sponsor maintains other retirement plans and desired design features.

Regardless of the format used, the deadline for establishing a SEP plan for a particular year is the business’s tax return deadline, plus extensions for that year.


Pete’s Partnership operates on a calendar year, and has a five-month filing extension for its 2017 tax return. If the partnership wants a 2017 SEP plan, it has until September 15, 2018, to sign a document to set up the plan.

Form 5305-SEP

The IRS model Form 5305-SEP is available free of charge from the IRS’ website and there is no need to file a completed copy of it with the IRS. The IRS will consider a SEP plan as established using the model form when the sponsor completes and signs the form without modification; each eligible employee (or, as a last resort the SEP plan sponsor on behalf of an employee) establishes a traditional IRA to receive contributions, and the employer gives required notices to all eligible employees.

A SEP plan sponsor may not use the model Form 5303-SEP if any of the following statements are true. The employer

  • Maintains any other qualified retirement plan (except for another SEP or salary reduction SEP plan);
  • Has any eligible employees for whom traditional IRAs do not exist;
  • Uses the services of leased employees;
  • Wants a plan year other than the calendar-year;
  • Wants to exclude members of a controlled group of employers; or
  • Wants a contribution allocation formula that is other than pro rate (i.e., integrated with Social Security or flat dollar).

Prototype SEP

Prototype SEP plan documents are available for a nominal fee from various prototype document sponsors for use when a model form is not permitted and/or the employer wants more flexibility in plan design. By filing IRS Form 5306-A, Application for Approval of Prototype Simplified Employee Pension (SEP) or Savings Incentive Match Plan for Employees of Small Employers (SIMPLE IRA Plan), and paying a fee, a prototype document sponsor (e.g., a bank, credit union, mutual fund company, etc.) can receive pre-approval of its plan document from the IRS in the form of an IRS opinion letter. An opinion letter states that a SEP agreement is acceptable in form. The IRS has prepared a Listing of Required Modifications (LRMs), or sample language, to assist document sponsors in drafting an acceptable prototype SEP.

An employer using a prototype SEP plan document, rather than a model, can

  • Use the business’s fiscal year as the plan year rather than the calendar year;
  • Use the services of leased employees;
  • Select a pro rata, integrated or flat dollar contribution allocation formula;
  • Maintain another qualified plan in addition to the SEP plan; and
  • Contribute a top-heavy minimum contribution only when the plan is actually top-heavy.

Individually Designed

An employer can engage an attorney to draft an individually designed SEP plan document that is unique to the employer, and request a letter ruling from the IRS as to its acceptability, if desired. While these employer-specific documents can be more flexible than a model or prototype document, an adopting employer will incur higher costs as a result of drafting, establishment and maintenance fees.


The IRS requires businesses that want SEP plans to execute a written plan document containing the terms of the arrangement. There are three general SEP plan document formats from which to choose. Considerations as to the most appropriate form include, but are not limited to, cost, whether the business maintains other retirement plans and desired design features. Business owners should consult a tax and/or legal advisor regarding their particular circumstances.

© Copyright 2018 Retirement Learning Center, all rights reserved
Print Friendly Version Print Friendly Version

IRAs, SEPs, SIMPLEs and Qualified Charitable Distributions


My client has a simplified employee pension (SEP) IRA through his place of employment. He’s wondering if he can make a tax-free, qualified charitable distribution (QCD) from his SEP IRA?

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with an advisor in South Dakota is representative of a common inquiry involving charitable IRA distributions.

Highlights of Discussion

A QCD is any otherwise taxable distribution (up to $100,000 per year) that an “eligible IRA owner or beneficiary” directly transfers to a “qualifying charitable organization.” QCDs were a temporary provision in the Pension Protection Act of 2006.  After years of provisional annual extensions, the Protecting Americans from Tax Hikes Act of 2015 reinstated and made permanent QCDs for 2015 and beyond.

With tax rates dropping in 2018 as a result of the Tax Cuts and Jobs Act of 2017, taxpayers may get more “bang for their bucks” on their 2017 tax returns by completing a QCD by December 31, 2017.

Generally, IRA owners must include any distributions of pre-tax amounts from their IRAs in their taxable income for the year. Aside from the benevolent aspect of making a QCD, a QCD is excludable from taxable income, plus it may count towards the individual’s required minimum distribution (RMD) for the year, and may lower taxable income enough for the person to avoid paying additional Medicare premiums. Note that he or she would not be entitled to an additional itemized tax deduction for a charitable contribution when making a QCD. (Apart from a QCD, IRA owners who take taxable IRA distributions and donate them to charitable organizations may be eligible to deduct such amounts on their tax returns for the year if they itemize deductions (Schedule A of Form 1040). See IRS Tax Topic 506 and IRS Publication 526, Charitable Contributions for more information.)

An eligible IRA owner or beneficiary for QCD purposes is a person who has actually attained age 70 ½ or older, and has assets in traditional IRAs, Roth IRAs, or “inactiveSEP IRAs or savings incentive match plans for employees (SIMPLE) IRAs. Inactive means there are no ongoing employer contributions to the SEP IRA or SIMPLE IRA. A SEP IRA or a SIMPLE IRA is treated as ongoing if the sponsoring employer makes an employer contribution for the plan year ending with or within the IRA owner’s taxable year in which the charitable contribution would be made (see IRS Notice 2007-7, Q&A 36).

Generally, qualifying charitable organizations include those described in §170(b)(1)(A) of the Internal Revenue Code (IRC) (e.g., churches, educational organizations, hospitals and medical facilities, foundations, etc.) other than supporting organizations described in IRC § 509(a)(3) or donor advised funds that are described in IRC § 4966(d)(2). The IRS has a handy online tool Exempt Organization Select Check, which can help taxpayers identify organizations eligible to receive tax-deductible charitable contributions.

Where an individual has made nondeductible contributions to his or her traditional IRAs, a special rule treats amounts distributed to charities as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions.

Be aware there are special IRS Form 1040 reporting instructions that apply to QCDs.

Section IX of IRS Notice 2007-7 contains additional compliance details regarding QCDs. For example, QCDs are not subject to federal tax withholding because an IRA owner that requests such a distribution is deemed to have elected out of withholding under IRC § 3405(a)(2) (see IRS Notice 2007-7, Q&A 40 ).


Eligible IRA owners and beneficiaries, including those with inactive SEP or SIMPLE IRAs, should be aware of the benefits of directing QCDs to their favorite charitable organizations.


© Copyright 2018 Retirement Learning Center, all rights reserved