Because of the plan’s simplicity, affordability and flexibility (contributions can be stopped or started at any time), the SEP is great for small businesses, professionals and self-employed people. Of course, certain rules do apply:

1. Employees cannot contribute personally. Only employer contributions are permitted. If employee participation is important, consider the SIMPLE-IRA instead of the SEP-IRA.
2. SEP plans cannot discriminate. Employees must receive equal percentage contributions.
3. A SEP plan must cover anyone:
   • who is 21 years old;
   • who has worked for the employer for at least three of the past five years; and
   • who has earned at least $550 for the year. (A plan may be less restrictive, but it cannot be more restrictive. All contributions are immediately and 100 percent vested.)


4. Contributions in 2010 may not exceed 25 percent of compensation or $49,000, whichever is less. Self-employed individuals may not contribute more than 20 percent of compensation or $49,000, whichever is less.