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

Both 408(k) and 401(k) refer to sections of the Internal Revenue Code that outline employer-sponsored retirement plans. Both provide guidelines for plans that allow employees to set aside a portion of their paychecks before taxes are taken out to be invested in a special account meant for retirement savings.

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 more commonly known as the simplified employee pension or SEP IRA.

Key Takeaways

  • 408(k)s and 401(k)s are both retirement savings plans that employers can offer to employees.
  • 401(k)s are the most common type of plan.
  • A SEP is only available to companies with 25 employees or fewer.
  • Unlike a 401(k), employee contributions are not permitted as part of the SEP contribution limits.


According to the IRS, "SEPs were authorized by Congress in 1978 to provide employers with a simpler, less complicated manner of providing retirement benefits for themselves and their employees."

Section 408(k)(1) of the Internal Revenue Code defines a SEP as an "individual retirement account or individual retirement annuity with respect to certain participation, contribution, discrimination, and withdrawal requirements being met."

Employers may contribute to SEP IRAs even when the employee is also the employer. Employers may 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.


A 401(k) is the most common type of retirement savings account offered. It is a qualified, employer-sponsored savings plan. 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 a number of investment options chosen by the employer. With a SEP IRA, employees choose their own investments.

Key Differences

Essentially, what differentiates the 408(k) SEP IRA from the 401(k) is that it's only available to companies with 25 or fewer employees. 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 $58,000 for 2021 ($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 the IRA limits ($6,000 for 2021 and 2022—plus an additional $1,000 for those age 50 or older).
  • 408(k) minimum earnings for eligibility. The minimum compensation threshold is $650 in 2021 and 2022.
  • SEP IRA maximum allowable compensation. No matter how much an employee earns, the annual compensation limit that can be considered in determining contributions to a SEP IRA is $290,000 in 2021 ($305,000 for 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 with 25 employees or less; or those who are self-employed and would normally 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, 2021 contributions to a SEP IRA may be made until April 15, 2022, or until October with a filing extension. 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 on their own, choosing their own 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 types of accounts are inaccessible without a penalty until the account holder reaches the qualified age of 59½.
Article Sources
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  1. Internal Revenue Service. "4.72.17 Simplified Employee Pensions (SEPs) and Salary Reduction Simplified Employee Pensions (SARSEPs)." Accessed Nov. 24, 2021.

  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?" Accessed Nov. 24, 2021.

  3. Internal Revenue Service. "Employee Plans CPE Topics for 2002: Chapter 15: Simplified Employee Pensions (SEPs)," Page 15-3. Accessed Nov. 24, 2021.

  4. Internal Revenue Service. "SEP Retirement Plans for Small Businesses," Page 2. Accessed Nov. 24, 2021.

  5. Internal Revenue Service. "2020 Publication 560: Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)," Page 5-6. Accessed Nov. 24, 2021.

  6. Internal Revenue Service. "401(k) Plan Overview." Accessed Nov. 24, 2021.

  7. Internal Revenue Service. "Simplified Employee Pension Plan (SEP)." Accessed Nov. 24, 2021.

  8. Internal Revenue Service. "SEP Plan FAQs." Accessed Nov. 24, 2021.

  9. Internal Revenue Service. "Retirement Plans for Self-Employed People." Accessed Nov. 24, 2021.

  10. Internal Revenue Service. "Retirement Plans FAQs regarding SARSEPs." Accessed Nov. 24, 2021.

  11. Internal Revenue Service. "Retirement Plan FAQs Regarding Contributions - Are Retirement Plan Contributions Subject to Withholding for FICA, Medicare or Federal Income Tax?" Accessed Nov. 24, 2021.

  12. Internal Revenue Service. "Publication 560 (2020), Retirement Plans for Small Business." Accessed Nov. 24, 2021.

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