Key Points
Top-Heavy Rules
Top-heavy plans are those that disproportionately benefit key personnel over rank-and-file employees. A SEP is considered top-heavy if the aggregate account balances of key employees exceed 60% of the total value of all participants’ accounts.
Key employees are:
- Officers earning more than $235,000 in the current plan year (2026, inflation-adjusted),
- employees who own more than 5% of the employer (at any time during the current or prior plan year), or
- employees who own more than 1% of the employer and earn more than $150,000.
| Key Employee Category | 2026 Threshold |
|---|---|
| Officers | Compensation > $235,000 |
| 5%+ owners | No compensation minimum |
| 1%+ owners | Compensation > $150,000 |
If a SEP is top-heavy, the employer must make a minimum contribution of 3% of compensation for each non-key employee who is a plan participant during the plan year — even if the employer makes no contribution for key employees in that year. The $360,000 compensation cap applies to this calculation as well.
This 3% minimum ensures that rank-and-file employees receive at least a baseline benefit whenever the plan is top-heavy, preventing the plan from being used purely as a vehicle for key employee retirement funding.
Integration with Social Security
Employers who establish Non-Model SEPs may use a technique called integration (also called permitted disparity) to take Social Security (OASDI) taxes into account when calculating SEP contributions.
Because employers pay Social Security taxes on behalf of their employees (up to the FICA wage base), integration allows the employer to reduce SEP contributions for employees whose wages are below the Social Security taxable wage base — essentially treating the Social Security contribution as part of the employer’s total retirement benefit commitment. The net effect is that higher-paid employees (whose wages exceed the Social Security wage base) may receive a higher effective SEP contribution rate.
Integration is most beneficial for employers with a mix of high-earning and low-earning employees, where the owner wants to maximize contributions for higher-paid workers while still covering all eligible employees. The rules for permitted disparity are complex and are discussed in detail in Chapter 1 (Contributions & Benefits).
Employers using Form 5305-SEP (the Model SEP) are not permitted to integrate contributions with Social Security. The simplicity of the Model SEP comes with the limitation that contributions must be a uniform percentage of compensation, unadjusted for Social Security taxes.
Employers who wish to use integration must establish a Non-Model SEP — either a prototype plan approved by the IRS for a financial institution, or an individually designed plan submitted for an IRS favorable determination letter.
Vesting
The employee’s right to employer contributions in a SEP is always 100% immediately vested. The employee has a full, nonforfeitable right to withdraw contributions from their SEP-IRA at all times. An employer may not:
- impose a vesting schedule on SEP contributions,
- prohibit withdrawals from the SEP-IRA, or
- require that employer contributions remain in the account for any period of time.
This stands in stark contrast to qualified plans such as 401(k)s and pension plans, which may impose cliff or graded vesting schedules requiring years of service before employees gain full ownership of employer contributions.
Because SEP contributions are immediately vested and held in the employee’s own IRA, SEP benefits are completely portable. When an employee terminates employment, they take their SEP-IRA with them — there is no distribution, rollover, or transfer required. The account simply remains in place as the employee’s own IRA.
Although employees may withdraw SEP contributions at any time without employer restriction, the standard IRA distribution rules still govern the tax treatment:
- Withdrawals are taxable as ordinary income in the year received.
- Withdrawals before age 59½ are subject to a 10% early withdrawal penalty, unless an exception applies (disability, death, SEPPs, first-time homebuyer, etc.).
Because the SEP is funded through the employee’s own IRA — not a trust managed by the employer — the employer is generally relieved of fiduciary liability for:
- the investment performance of the IRA,
- losses resulting from early withdrawals by employees, and
- other problems typically associated with plans in which the employer acts as trustee or plan administrator.
This shift in responsibility is one of the key practical advantages of the SEP structure compared to traditional qualified plans.