- Employers may make contributions only for employees who are eligible to participate in a SEP IRA plan. The U.S. Department of Labor reports that to be eligible, you must be at least 21 years old and must have worked for the employer at least three of the previous five years. Employers may, at their discretion, exclude union workers covered by a contract that addresses retirement issues and nonresident aliens whose earnings came from sources outside the United States. Employees with less than $500 in earnings for the year may also be excluded.
- The employer must include all eligible workers in the SEP plan and make contributions to a separate IRA for each at whatever rate the employer has selected. This includes the owner of the business as well as seasonal and part-time workers. Contributions must be made for employees who leave their jobs for any reason during the year employment terminates.
- The maximum contribution an employer can make to an employee's SEP IRA is 25 percent of the employee's earnings. However, the employer may choose to contribute a smaller percentage. Contributions are always 100 percent vested. That is, once an employer makes a contribution to SEP IRAs, the money becomes the employee's and may not be rescinded. As of 2011, the maximum dollar contribution allowed by the IRS is $49,000.
- A person who is self-employed may set up a SEP IRA. The maximum dollar contribution is $49,000 (as of 2011) just as for employer-provided plans. Calculation of earnings is different, however. According to the IRS, if you are self-employed you can contribute up to 20 percent of your net earnings from the business. To calculate net earnings, first subtract all deductible business expenses from gross revenues. Multiply the remainder by 92.35 percent to determine net earnings.
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