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Table of Contents

408(k) Plan vs. 401(k) Plan: What's the Difference?

Both 408(k) and 401(k) are sections of the Internal Revenue Code that outline employer-sponsored retirement plans. Both sections provide guidelines for plans that give employees a means of saving for retirement in a special account.

That's where these two alphanumeric codes diverge. While 401(k)s have become synonymous with a widely available retirement savings vehicle, 408(k)s set the guidelines for what is called the simplified employee pension (SEP) IRA. Learn more about the differences and which one you might be eligible for.

Key Takeaways

  • 408(k)s and 401(k)s are retirement savings plans employers can offer to employees.
  • 401(k)s are the most common type of plan.
  • A SEP is available to companies of any size.
  • Unlike a 401(k), employee contributions are not permitted as part of the SEP contribution limits.

408(k)s

A simplified employee pension plan is an individual retirement account or annuity that meets the contribution requirements set by the Internal Revenue Code. It can be created by a business of any size. Only the employer can make contributions to the plan, and every employee receives the same contribution amounts.

Those who are self-employed may contribute to SEP IRAs. Employers can also make tax-deductible contributions on behalf of eligible employees—including the business owner—to their SEP IRAs. The employer is allowed a tax deduction for plan contributions that do not exceed the statutory limit.

401(k)s

A 401(k) is the most common type of retirement savings account offered. It is an employer-sponsored savings plan in which the employer and employee can make contributions. Employers offering a 401(k) plan may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings in a 401(k) plan accrue on a tax-deferred basis.

401(k) plans are slightly more complex than 408(k)s, as they generally contain several investment options chosen by the employer. With a SEP IRA, employees choose their investments.

Key Differences

Essentially, what differentiates the 408(k) SEP IRA from the 401(k) is that it's only available to companies of any size. Here are some other distinguishing features.

  • In general, only employers can contribute to a SEP IRA. Unlike a 401(k), employee contributions are not permitted as part of SEP contribution limits.
  • There are contribution limits for 408(k)s. Employers can contribute as much as 25% of an employee's salary but no more than $66,000 for 2023 ($61,000 for 2022). No catch-up contributions are allowed, as SEP IRAs are funded only with employer contributions.
  • Some SEP IRAs permit separate, personal IRA contributions. If your company's SEP IRA plan permits it, employees can make their own IRA contributions to the same account, up to $6,500 for 2023 (up from $6,000 in 2022) plus an additional $1,000 for those age 50 or older).
  • 408(k) minimum earnings for eligibility. The minimum compensation threshold is $750 (up from $650 in 2022).
  • SEP IRA maximum allowable compensation. No matter how much an employee earns, the annual compensation limit for determining contributions to a SEP IRA in 2023 is $330,000 (up from $305,000 in 2022).
  • For both, contributions are not taxed. As with a 401(k), employer contributions to your section 408(k) plans are not taxed.
  • Who can have a 408(k)? SEP IRAs are available for employees of companies of any size; or those who are self-employed and would typically not have access to a retirement plan.
  • SEP IRA contributions can be tax-deductible. Self-employed people with a SEP IRA can deduct the cost of a certain amount of personal contributions to their retirement funds from their income.
  • Employer contributions under a SEP IRA must be equal. That means each eligible employee must get the same percentage of their salary contributed to the plan.
  • Contribution deadlines follow IRA deadlines. For example, 2022 contributions to a SEP IRA may be made until April 18, 2023. With a 401(k), the deadline is the calendar year (i.e., Dec. 31).
  • Employees, not employers, manage a SEP account. Overall, 401(k) plans are a bit more complex than SEPs, with many investment options set up by the employer, including mutual funds that contain stocks, bonds, and commodities. With a SEP IRA, the employer does not set up investment options. Instead, the employee manages the SEP IRA, choosing their investments. Employers essentially put money (not real property, which is forbidden) into individual employee individual retirement accounts (IRAs). This saves the employer from paying administration costs as they would with a 401(k).
  • Both have a penalty for early withdrawal. Both accounts are inaccessible without a penalty until the account holder reaches the qualifying age of 59½.

What Is a 408(m)(3) Plan?

It isn't a plan. Internal Revenue Code 408(m)(3)(A) is a section that describes the types of coins that can be purchased with retirement funds.

Is a SIMPLE IRA a 408?

The number of the retirement plan, such as 408 or 401, comes from the Code of Federal Regulations subsection that describes the plan type. Because section 408(p) defines a SIMPLE plan, it is a 408 plan.

Is a 408(a) the Same as a Traditional IRA?

Section 408(a) describes the different types of IRAs, including the traditional IRA. So, an IRA could be called a 408(a).

Article Sources
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  2. Internal Revenue Service. "How Much Can I Contribute to My Self-Employed SEP Plan if I Participate in My Employer’s SIMPLE IRA Plan?."

  3. Internal Revenue Service. "Simplified Employee Pension Plan (SEP)."

  4. Internal Revenue Service. “Publication 560: Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans),” Page 16.

  5. Internal Revenue Service. "Simplified Employee Pension Plan (SEP)."

  6. Internal Revenue Service. "401(k) Plan Overview."

  7. Internal Revenue Service. "Simplified Employee Pension Plan (SEP)."

  8. Internal Revenue Service. "SEP Plan FAQs."

  9. Internal Revenue Service. "SEP Plan FAQs."

  10. Internal Revenue Service. “SEP Contribution Limits (Including Grandfathered SARSEPs).”

  11. Internal Revenue Service. "2023 Limitations Adjusted as Provided in Section 415(d), etc.," Page 2.

  12. Internal Revenue Service. "2023 Limitations Adjusted as Provided in Section 415(d), etc.," Page 1.

  13. Internal Revenue Service. “401(k) Plan Overview.”

  14. Internal Revenue Service. "SEP Plan FAQs."

  15. Internal Revenue Service. “Save for Retirement Now, Get a Tax Credit Later: Saver’s Credit Higher Limits Can Help Low- and Moderate-Income Workers Save More in 2023.”

  16. Internal Revenue Service. “Retirement Topics - Exceptions to Tax on Early Distributions.”

  17. Internal Revenue Service. "Issue Snapshot - Investments in Collectibles in Individually-Directed Qualified Plan Accounts."

  18. Internal Revenue Service. "SIMPLE IRA Plan FAQs."

  19. U.S. House of Representatives. “26 USC 408: Individual Retirement Accounts.”

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