3703 / What are the limits with respect to employer contributions to a simplified employee pension (SEP)?

Contributions made by an employer to an employee’s SEP are excludable from the employee’s income to the extent that they do not exceed the lesser of: (1) 25 percent of compensation from the employer (determined without regard to that employer’s contribution to the SEP) or (2) $70,000 in 2025.¹ Compensation is capped by the limits in effect under IRC Sec. 414(s) ($350,000 in 2025, $345,000 in 2024, $330,000 for 2023, $305,000 for 2022) ( Q 3867).² Despite the $350,000 limit on compensation, the maximum permitted SEP contribution is capped at $70,000 for 2025 (where $70,000 is less than $350,000 × 25 percent).

Planning Point: Interestingly, “compensation” is defined for these purposes as amounts actually includible in the employee’s gross income; consequently, “elective deferrals” by an employee (i.e. amounts contributed to a qualified retirement plan) would not be considered in the “lesser of” calculation above as compensation.³ This definition of compensation, however, differs from the definition of compensation used to determine the employer’s deduction when contributing to an employee’s SEP, which does consider elective deferrals when determining income ( Q 3704).

When determining the contribution limits of a “self-employed” individual, “compensation” is the individual’s net earnings from self-employment.

If an individual is employed by more than one employer (other than employers who are under common control or compose a controlled or affiliated service group) during the tax year, the 25 percent limit is applied separately to each employer.⁴ Under proposed regulations, contributions by (and compensation received from) employers who are under common control or who are members of a controlled group must be aggregated for purposes of this limit.⁵ It would seem that the IRS may also require such aggregation where the employers are members of an affiliated service group.

If an individual is self-employed with respect to more than one trade or business, the maximum contribution will be the lesser of the amount determined by applying the limit separately to each trade or business or the amount determined by applying the limit as if the trades or businesses constituted one employer.⁶ In an integrated plan, the Section 415 dollar limit must be reduced in the case of a highly compensated employee ( Q 3930).⁷