Which employees must be covered by a SEP?

The three-part test

A simplified employee pension is a written plan that lets you contribute to individual retirement arrangements (SEP IRAs) set up by or for each eligible employee. Publication 560 defines an eligible employee as someone who meets all three requirements. The employee has reached age 21. The employee has worked for you in at least 3 of the last 5 years. And the employee received at least $750 in compensation from you in 2025, a figure that is $800 for 2026. All three must be true; missing any one means you are not yet required to include that person.

The 3-of-5 rule is a time-in-service test, not a straight 3-year rule. The years do not have to be consecutive. An employee who worked in 2021, 2023 and 2025 meets it for 2025 even with gaps.

Looser is fine, stricter is not

The publication adds a tip: you can use less restrictive participation requirements than those listed, but not more restrictive ones. For example, you may cover employees at 18 instead of 21, drop the 3-of-5-year test, or lower the pay threshold. You may not require a fourth year of service, age 25, or a higher pay minimum. If your plan uses the IRS model Form 5305-SEP, remember that it must give benefits to all eligible employees and that the model cannot be used in certain situations, such as when you already maintain another qualified retirement plan.

Who can be left out

Two groups of otherwise eligible employees can be excluded from coverage: employees covered by a union agreement whose retirement benefits were bargained for in good faith by the union and you, and nonresident alien employees who have received no U.S. source wages, salaries or other personal services compensation from you. A SEP IRA may also have to be set up for a leased employee, as defined in chapter 1, who is treated as your employee for retirement plan purposes.

Everyone else who meets the test needs an account. If a SEP IRA has not been set up for an eligible employee, Form 5305-SEP cannot be used and the plan is not complete.

What happens to your contribution

You do not have to contribute every year. But if you do, the contribution must follow a written allocation formula and must not discriminate in favor of highly compensated employees, and you must contribute to the SEP IRAs of all participants who actually performed personal services during the year, including employees who died or left before the contribution was made. For 2025 the contribution to a common-law employee’s SEP IRA cannot exceed the lesser of 25% of the employee’s compensation or $70,000; the publication’s example is an employee earning $21,000, for a $5,250 maximum (25% × $21,000). See our compensation limit page for how the $350,000 cap enters.

Worked example

Maria turned 22 this year. She started with you in 2023, so she has worked in 3 of the last 5 years if you count 2023, 2024 and 2025, and she earned $18,000 in 2025. Age 22 meets the 21 requirement, 3 of 5 years meets the service test, and $18,000 is above $750. She must be covered. If her first day had been in March 2025, she would have only 1 year of work in the last 5 and could be left out for 2025 under the default rules, though you could choose to include her anyway. The calculator above lets you test any combination.

Employees who participate hold the IRA themselves. A SEP IRA is owned and controlled by the employee, and you cannot prohibit withdrawals or require that any part of your contribution stay in the account.

Deadlines to remember

You can set up a SEP for any year as late as the due date, including extensions, of your income tax return for that year. To deduct contributions for a year you must make them by the same date. After adoption, you must give each eligible employee a copy of Form 5305-SEP, its instructions and the other listed information; an IRS model SEP is not considered adopted until you do. You also give your eligible employees a yearly statement showing contributions to their SEP IRAs, and notice of any excess contributions.

Sources

• IRS Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (2025): Chapter 2, Simplified Employee Pensions (SEPs): Eligible employee; Excludable employees; Setting up a SEP; How Much Can I Contribute?. Read November 2, 2026.

Edition read: Publication 560 (2025), for use in preparing 2025 returns. Where the publication gives 2026 figures, this page labels them 2026. Dollar limits change every year; check the current publication and form instructions for your plan year. This page summarizes the publication and does not replace it.