Beginning in 2002 EGTRRA 2001 has increased SEP (Simplified Employee Pension) contributions that can be made by self-employed people or for employees of companies who offer SEPs. Under prior law, in effect through 2001, the maximum SEP contribution was $25,500 which was based on 15% of a maximum compensation of $170,000 ($170,000 x 15% = $25,500).

The intent of the tax law (EGTRRA 2001) was to raise the percentage that can be contributed to a SEP for 2002 to 25%, but the tax writers goofed. They forgot to change one of the Code sections. That left the percentage at 15%, but that has now been corrected by the Job Creation and Worker Assistance Act of 2002, signed into law on March 9, 2002.

The 2002 SEP limit is now the 25% of compensation that was intended by the original tax act. For 2002, 25% of compensation of up to $200,000 can be contributed to a SEP, but regardless of the amount of compensation, the SEP contribution is limited to $40,000 per year.

If you are an employee of a company that offers a SEP for 2002 at the highest percentage, the 25%, and your income is $200,000, your employer is limited to making a $40,000 contribution to your SEP. If you are self-employed, the 25% nets down to 20%. If your 2002 net earnings from self-employment was $200,000, you would be limited to a maximum SEP contribution of $40,000 (20% of the $200,000). That's a huge increase over the $25,500 maximum for 2001.