SIMPLE & SEP IRAs
The straightforward plans, and when to leave them behind
A SIMPLE or a SEP is often the right first plan for a small business. The question is usually whether you have outgrown one without noticing.
In short
A SEP IRA is funded only by the employer, with the same percentage of pay for everyone eligible. A SIMPLE IRA lets employees defer salary and requires an annual employer contribution. A 401(k) permits the largest contributions and the most design flexibility, at the cost of testing and heavier administration. MTP Private Wealth at Farther helps small employers choose among the three.
Side by side
How the three compare
Contribution limits change every year, so this compares the structures rather than the current dollar figures. Ask us for this year's numbers.
| Criterion | SEP IRA | SIMPLE IRA | 401(k) |
|---|---|---|---|
| Who funds it | Employer only. Employees cannot defer their own salary. | Both. Employees defer, and the employer is required to contribute. | Both, and the employer contribution is largely discretionary. |
| Employer obligation | Discretionary each year, but the same percentage of pay for everyone eligible, including the owner. | Mandatory every year: either a match up to a set percentage or a flat contribution for all eligible staff. | Flexible. Matching, profit sharing, safe harbor, or nothing at all, depending on how you design it. |
| Relative contribution ceiling | High for the owner, but only through employer contributions, and the uniform-percentage rule makes staff cost scale with it. | Lowest of the three. The deferral limit is well below a 401(k). | Highest, particularly with profit sharing, and higher still when paired with a cash balance plan. |
| Administration | Lightest. No annual return in most cases and minimal ongoing paperwork. | Light. No annual return in most cases, though the mandatory contribution has to be tracked. | Heaviest. Annual filing, testing, notices, and usually a third-party administrator. |
| Nondiscrimination testing | None, because the uniform percentage requirement does that work. | None, because the mandatory employer contribution does that work. | Yes, unless you adopt a safe harbor design that provides an exemption. |
| Loans | Not permitted. | Not permitted. | Permitted if the plan document allows it. |
| Roth contributions | Limited, and depends on current rules and your provider. | Limited, and depends on current rules and your provider. | Standard, and widely available. |
| Typically suits | A self-employed owner or a business with very few employees, where simplicity matters most. | A small business with modest payroll wanting employees to save without the cost of a 401(k). | A business with steady profit, a real payroll, or owners wanting to contribute more. |
Time to move
Signs you have outgrown a SIMPLE or a SEP
Any one of these is worth a conversation. Two or more and the answer is usually a 401(k).
- The owner wants to put away more than the plan's deferral limit permits.
- You want to vary contributions between owners and staff rather than paying a uniform percentage.
- Headcount has grown and the mandatory employer contribution has become a real budget line.
- Employees are asking for loans, Roth deferrals, or a broader investment menu.
- You want a vesting schedule, which SIMPLE and SEP contributions do not allow.
- You are considering a cash balance plan, which needs a 401(k) underneath it.
A word on timing
Switching plans is a calendar problem
Moving from a SIMPLE to a 401(k) has notice requirements and timing rules, and the two generally cannot cover the same employees in the same year. Employers who decide in the autumn that they want a new plan in January often find they have missed the window.
If a change is on your mind for next year, the conversation belongs in the first half of this one. We handle the sequencing and the notices.
Common questions
SIMPLE and SEP questions
A SEP is funded entirely by the employer, and employees cannot defer their own salary. A SIMPLE lets employees defer and requires the employer to contribute every year. A SEP gives the employer more year-to-year flexibility; a SIMPLE lets employees save from their own pay.
Usually a 401(k) with profit sharing, and more still when paired with a cash balance plan. A SEP can produce a high owner contribution, but the uniform-percentage requirement means every eligible employee gets the same percentage of pay, so staff cost rises alongside it.
When the deferral ceiling is limiting the owners, when you want to differentiate contributions or add vesting, or when the mandatory employer contribution has grown into a significant budget item. Switching has timing rules, so plan the transition a year ahead.
Generally not for the same employees in the same year. Moving between them requires following specific timing and notice rules, which is one of the more common places small employers get tripped up. We handle the sequencing.
SEP and SIMPLE plans avoid testing, because the uniform contribution or mandatory employer contribution accomplishes the same goal. A 401(k) is tested unless you adopt a safe harbor design, which trades a required employer contribution for an exemption.
Next step
Tell us your headcount and we will tell you the plan
It usually takes one conversation. Payroll size, profit consistency, and what the owners want to contribute are enough to narrow it to one answer.