The Simplified Employee Pension Individual Retirement Account (SEP IRA), which combines the advantages of a qualified plan with the simplicity of a Traditional IRA, is designed to relieve the employer of complicated reporting requirements. The employer simply reports contributions on his business tax return.
The SEP IRA is suited for "S" Corporations, partnerships, non-profit organizations, sole proprietors (self-employed) and any size business. It is a particularly good fit for small employers and start-up plans.
With a SEP IRA, the employer is adding an attractive benefit for employees. Each employee establishes his own Traditional IRA to receive the SEP contributions, selects his own IRA trustee or custodian and chooses and directs his own investments, thereby relieving the employer of many of the administrative responsibilities normally associated with the retirement plan.
Since each employee maintains his own Traditional IRA to hold SEP contributions, the employer avoids large maintenance fees that traditional business retirement plans often incur.
The employer is permitted to deduct the contribution made on behalf of each employee. Any earnings on the SEP account assets accumulate tax-deferred until withdrawn.

Eligibility Requirements

The employer must include eligible employees who have met the following requirements:

• Reached age 21
• Worked at least three or more of the five preceding years (Note: Any work in a calendar year counts as a year of service)
• Earned annual compensation minimums (Amounts are adjusted periodically for inflation).

Note: All eligible employees must participate in the plan. Once the eligibility period has been achieved, then compensation of $550 (in 2011), subject to Cost of Living Adjustments (COLAs), must be earned for the tax year before a contribution is made.

Contribution Limits

In 2011, contributions an employer can make to an employee’s SEP IRA cannot exceed the lesser of 25% of employee’s compensation or $49,000. Please note the contribution limits are different for self-employed persons (see IRS Publication 560).
The annual compensation limit is $245,000; individuals earning more than that amount can contribute to a SEP IRA, but any compensation over $245,000 cannot be included in determining the allowable contribution amount.

Deadlines for Contributions

On or before the employer’s tax-filing deadline, including extensions. A SEP may be maintained on a calendar year basis or non-calendar, fiscal year basis.

Qualified Distributions (without tax penalty)

• Reaching age 59½
• Permanent Disability
• Death
• Substantially equal payments based on a life expectancy formula that cannot be modified for at least five years OR until reaching age 59½, if later
• Payments for medical expenses in excess of 7.5% of Adjusted Gross Income (if deductible on taxes)
• Payments for medical/health insurance premiums for certain unemployed individuals
• Purchase of a first home ($10,000 lifetime limit)

Education Expenses

For distributions used to pay for post-secondary education expenses of individual, spouse, child or grandchild at an eligible educational institution - the distribution is reduced by amounts received from tax-free scholarships, grants and other tax-free education assistance programs.

For 2012:

Tax benefits	Tax-deferred growth, tax-deductible contributions
Fees	No annual fees, no establishment fees1
Eligibility	Must be sole proprietor, a business owner, in a partnership, or earn self-employment income by providing a service
Contribution rules	Must be made by the employer, can vary each year between 0% - 25% of compensation (maximum $50,000 for 2012), and each eligible employee must receive the same percentage.
Establishment deadline	April 17 tax filing deadline for most self-employed individuals and small-business owners (including any extensions)
Administrative responsibilities	No plan tax filings with IRS. Employee notification of employer's contribution. 5305 SEP (PDF): Employers must fill out and retain this form in their records.
Employee responsibilities	Each employee must open an individual SEP-IRA account
Withdrawals	Minimum required distributions starting at age 70½. 10% early withdrawal penalty if under age 59½, subject to certain exceptions