5305 vs 5305A: Key Differences for SEP-IRA Filings

Choosing the right form for setting up a Simplified Employee Pension (SEP) IRA is essential for employers providing retirement benefits. The IRS offers two primary options: Form 5305-SEP and Form 5305A-SEP, each with distinct rules affecting plan operations. Understanding these differences ensures compliance and helps employers select the best structure for their business.

While both forms establish agreements between an employer and a financial institution, they differ in setup requirements, administrative responsibilities, and contribution management.

Form 5305 Filings

Employers seeking a straightforward way to establish a SEP-IRA often use IRS Form 5305-SEP. This form allows a business to create a retirement plan without IRS approval or complex filings. By signing it, the employer agrees to contribute a set percentage of employees’ compensation, adhering to IRS limits. For 2024, the maximum contribution is the lesser of 25% of an employee’s compensation or $69,000.

A key feature of Form 5305-SEP is uniform contributions. If an employer contributes 10% of their own compensation, they must contribute the same percentage for all eligible employees. While this ensures fairness, it limits flexibility in structuring contributions. Employers can decide annually whether to contribute, adjusting based on financial conditions.

Contributions are deposited into each employee’s SEP-IRA at a financial institution of their choosing. Once deposited, employees control their accounts, including investment decisions. Employers cannot impose restrictions on fund management.

Form 5305A Filings

Businesses wanting more control over where SEP-IRA contributions are held may use IRS Form 5305A-SEP. Unlike Form 5305-SEP, which allows employees to choose their financial institution, Form 5305A-SEP requires all contributions to be held in a single trust or custodial account designated by the employer. This centralizes administration and gives employers greater oversight.

The employer or a designated trustee ensures compliance with IRS regulations, maintains records, and manages distributions. While this simplifies administration, it introduces fiduciary responsibilities absent in Form 5305-SEP.

Form 5305A-SEP also requires a written trust or custodial agreement detailing fund management. The financial institution serving as custodian must meet IRS qualifications, adding an extra layer of due diligence.

Distinctions in Employer Setup

The choice between Form 5305-SEP and Form 5305A-SEP affects how an employer structures their retirement plan. A major difference is whether the employer wants to offer additional retirement plans. Form 5305-SEP prohibits maintaining another qualified retirement plan, such as a 401(k) or profit-sharing plan, in the same tax year. This restriction does not apply to Form 5305A-SEP, allowing businesses to provide multiple retirement benefits.

Administrative complexity also differs. While both forms simplify retirement plan setup compared to traditional pensions, Form 5305A-SEP requires managing a trust or custodial account, which may involve hiring a third-party trustee. This adds costs and compliance requirements. In contrast, Form 5305-SEP requires only that the employer make contributions following IRS rules.

Employers using Form 5305A-SEP may also face additional reporting obligations. If the trust generates unrelated business taxable income (UBTI), the employer or trustee may need to file Form 990-T and pay taxes. While SEP-IRAs are generally exempt from annual Form 5500 filings, certain trust-held assets could trigger reporting requirements. Employers seeking minimal administrative complexity may prefer Form 5305-SEP.

Employee Eligibility

Eligibility for a SEP-IRA under either form follows IRS criteria. Employees must be at least 21 years old, have worked for the employer in at least three of the last five years, and have earned at least $750 in compensation for 2024. Employers can set less restrictive requirements but cannot impose stricter ones.

Part-time and seasonal workers qualify if they meet the service and compensation thresholds. Employers cannot exclude employees based on work schedule alone. Unlike 401(k) plans, which allow stricter eligibility conditions, SEP-IRAs must cover all eligible employees.

Independent contractors are not eligible for employer contributions. However, self-employed individuals, including sole proprietors and partners, can contribute to their own SEP-IRAs based on net earnings from self-employment, subject to IRS limits.

Key Reporting Details

Employers using Form 5305-SEP have minimal reporting requirements. Contributions must be reported on each employee’s Form W-2 if considered taxable wages, though SEP contributions are generally excluded from income and not subject to withholding. Employers must retain a signed copy of Form 5305-SEP and provide employees with written notice of the plan’s terms. The financial institution handling the SEP-IRA issues Form 5498, reporting contributions to the IRS.

For businesses using Form 5305A-SEP, reporting requirements differ due to the centralized trust or custodial account. The employer or trustee must ensure contributions are properly allocated and that the trust complies with IRS regulations. If the trust generates UBTI, Form 990-T may be required. While SEP-IRAs are generally exempt from Form 5500 filings, certain trust-held assets could introduce reporting obligations. Employers using this structure should consult a financial institution or tax professional to ensure compliance.