SEP IRA or 401k for Your Small Business?

The Simplified Employee Pension, (SEP) IRA, and 401k are both excellent retirement vehicles for small business employers because they offer low documentation and low costs set up fees. Both plans offer a one form enrollment application, per year. The key difference between the two is the amount managing and administration that the employer will be responsible for each respective plan. With a 401k, an employer must administer the account much more closely than with an IRA.


The SEP Independent Retirement Arrangement (IRA) option asks employees to set up their own retirement accounts. Each employee can use a provider of their choice, as long as the plan they set up meets the requirements for a qualified retirement plan with the IRS. Then, the employee provides the information for this account to the employer. The employer can assist the employee in saving money for retirement by offering direct deposit from each paycheck into the IRA. The employer can also offer to match contributions or fund the account independently. There is no mandate for the employer to vest funds into the account. 

SEP 401k

With the 401k option, the employer takes on a larger role in setting up the retirement plan for each employee. The employer is the one who establishes each employee's account. Then, the employer also manages the accounts through the use of a 401k administrator. The employee can still have money withheld from each paycheck to be deposited into the account. The employer again has the option to match these contributions. Even without matching, though, the employer maintains the responsibility for operating and reporting the accounts each year. This requires a greater degree of oversight and accounting. However, it also generates more employee loyalty. Employees are more reliant on the employer to provide for and protect a retirement savings. With an IRA, your employees can maintain their accounts regardless of where they work in the future.

Paperwork and Cost

Both the SEP IRA and the SEP 401k require only one form to file each year with the IRS. This provision is designed to help small businesses offer these options to employees. The cost for the two options will differ. With a 401k option, you will be the one paying an administrator to manage the accounts. These administrators may require payment based on a commission of total accounts or total money under management. As your company grows, your cost will grow. On the other hand, if your employees have IRAs, they are responsible for paying their own administrators.

Which is Best?

The 401k option may be best for a company that sees itself growing beyond the 100 employee cap for the SEP plan. You will have a two-year transition period to implement a new 401k plan, and the transition can be easier if you already have a 401k administrator. If you own a small business you do not see growing beyond 100 employees within 10 years, then an SEP IRA may be best. You can offer your employees benefits without too much trouble on your end, and you can always switch over in the future.

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