What Are the SEP IRA Matching Rules?
SEP IRA contributions are often misunderstood. Learn the employer-only funding rules, how they apply to all staff, and which plans offer a true match.
A Simplified Employee Pension, or SEP IRA, is a retirement savings plan for self-employed individuals and small business owners. Its design allows for straightforward administration and flexible funding, making it an appealing option for businesses that lack the resources for more complex retirement plans. While these plans offer significant contribution potential, the rules governing contributions can be a source of confusion.
The Employer-Only Contribution Framework
A common question about SEP IRAs is how employer matching contributions work. The direct answer is that they do not exist in this type of plan because employees cannot contribute from their salaries. In plans like a 401(k), a match is triggered when an employee defers a portion of their salary. Since SEP IRAs do not permit employee salary deferrals, a corresponding employer match is not possible.
All funds deposited into a SEP IRA are classified as employer contributions. This applies even to the business owner, whose contributions are made by the business entity rather than by the owner as an individual.
The flexibility of a SEP IRA comes from the employer’s ability to decide whether to contribute in any given year. An employer can contribute a significant amount one year and nothing the next, depending on the business’s cash flow. This flexibility applies only to the decision to contribute, not to how funds are allocated among participants.
Applying the Uniform Contribution Rule
Instead of a matching structure, SEP IRAs operate on a non-elective, uniform contribution rule. “Non-elective” means that if an employer contributes for anyone, including themselves, they must do so for all eligible employees. The contribution is not dependent on any action by the employee, ensuring owners fund their employees’ accounts if they fund their own.
When an employer makes a contribution, they must contribute the same percentage of compensation for every eligible employee, including the business owner. For example, if a business owner with a $200,000 salary contributes 10% to their own SEP IRA, they must also contribute 10% of gross compensation for every other eligible employee. An employee earning $50,000 would receive a $5,000 contribution.
These contributions are subject to annual IRS limits. An employer can contribute up to 25% of an employee’s compensation. For 2025, the maximum contribution is $70,000, and the maximum compensation that can be used for the calculation is $350,000. This means that even for very high earners, the contribution is calculated based on this capped compensation amount.
Identifying Eligible Employees
To apply the uniform contribution rule, an employer must first identify all eligible employees. According to the IRS, an employee must be included in the plan if they have reached age 21, worked for the employer in at least three of the preceding five years, and received at least $750 in compensation for the year. The low compensation threshold and service requirement mean many consistent part-time employees must be included.
Once an employee meets these three tests, the employer must contribute for them if they contribute for any employee. However, regulations permit employers to exclude certain employees from the SEP IRA. These exclusions include employees covered by a collective bargaining agreement, provided retirement benefits were part of negotiations. Nonresident alien employees who have not earned U.S. source income from the employer can also be excluded.
Retirement Plans with Matching Contributions
For business owners who want to offer a matching contribution to incentivize employees, other retirement plans are more suitable.
A SIMPLE IRA is a common alternative that incorporates an employer match. With this plan, employers are required to either match employee contributions dollar-for-dollar up to 3% of compensation or make a 2% non-elective contribution for all eligible employees.
A 401(k) plan offers greater flexibility for employer matching, though with increased administrative complexity and cost. An employer can design a discretionary matching formula, such as matching 50% of an employee’s contributions up to 6% of their salary. This allows the matching incentive to be tailored to the company’s financial goals. These plans are structured to accommodate both employee and employer contributions, making them the appropriate choice for a matching program.