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What is a SEP- IRA?

A Simplified Employee Pension (SEP) is an IRA plan that is initiated by completing Form 5305-SEP for any employer with one or more employees. Characteristics of a SEP include:

  • Discretionary employer contributions only (subject to 415 limitations), all contributions are 100% vested
  • The plan must offered to all employees who are at least 21 years old AND employed by the company for 3 of the last 5 years (and earned at least $550 in each of those years)
  • Loans are not permitted
  • Withdrawals are permitted at anytime
  • No Form 5500 required

The SEP can be initiated up to the date of the of the company's tax return (including extensions). A plan sponsor can not offer a SEP and a 401(k) Profit Sharing plan in the same year.

Key differences between a SEP and traditional 401(k) plan, from the perspective of the advantages of a traditional 401(k) plan:

  • 401(k) contributions are allowed
  • 401(k) company match are allowed
  • Increased Profit Sharing formula flexibility (including an hours requirement, last day rule, & integrated/cross tested available)
  • Company contributions can be subject to a vesting schedule
  • Eligibility flexibility (can include service and age requirements)
  • Loans are permitted

A 401(k) plan does bring in ADP/ACP testing if the plan design is not a safe harbor feature as well as the annual Form 5500 requirement (unless the plan qualifies for the Title I exemption as a solok plan).


What is a SIMPLE Plan?

A SIMPLE is initiated by completing Form 5304-SIMPLE or 530-SIMPLE for any employer with less than 100 employees. A company can elect a SIMPLE IRA or SIMPLE 401(k). Characteristics of a SIMPLE IRA include:

  • Eligibility - All employees who received at least $5,000 in compensation during any 2 prior years and expect to receive $5,000 during the current plan year. No age or service requirements. Discretionary employer contributions only (subject to 415 limitations), all contributions are 100% vested
  • 401(k) Contributions - Limited to SIMPLE limitations (the limitations are lower than a 401(k) plan)
  • Company Contribution - The contribution is required, either a company match of 100% up to 3% or 2% nonelective contribution to all eligible participants. Please note there is some flexibility on the company match (please contact your DWC consultant for more information). All company contributions are 100% vested.
  • Loans are not permitted
  • Withdrawals are permitted at anytime (watch out for additional 25% penalty if taken within the first 2 years of participation)
  • No Form 5500 required
  • Top Heavy Testing does not apply


Key differences between a SIMPLE IRA and SIMPLE 401(k) are as follows:

  • Eligibility - A SIMPLE 401(k) can impose eligibility requirements (age and service)
  • Loans - Are permitted in a SIMPLE 401(k)
  • Reporting Requirements - A SIMPLE 401(k) is very similar to a traditional 401(k) as the sponsor must file a Form 5500 every year and provide a Summary Plan Description to all eligible participants

For a comparison between a SIMPLE 401(k) and traditional 401(k), click here.


The content of this website is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances.