SEP IRA vs. SIMPLE IRA: What’s the Difference?

For small business owners and self-employed individuals, retirement plans offer a tax-advantaged way to save for the future and can help attract and retain employees. The Simplified Employee Pension (SEP) IRA and the Savings Incentive Match Plan for Employees (SIMPLE) IRA are two common choices due to their ease of administration compared to a 401(k). Each plan has distinct rules for eligibility, contributions, and administration, making it important to understand their differences before choosing one for your business.

Employer and Employee Eligibility

Any business entity, including a sole proprietorship, partnership, or corporation, can establish a SEP IRA. The primary consideration for employers is the plan’s broad participation requirement, which mandates that contributions be made for all employees who meet specific criteria.

The eligibility rules for employees under a SEP IRA are inclusive. An employer must cover any employee who is at least 21 years of age, has worked for the business in at least three of the last five years, and has received at least $750 in compensation for the year. These low thresholds mean that many part-time and long-term seasonal employees may qualify for the plan.

In contrast, a SIMPLE IRA is designed for smaller employers. To establish a SIMPLE IRA, a business must have 100 or fewer employees who earned $5,000 or more in compensation during the preceding year. The employer cannot maintain any other retirement plan while the SIMPLE IRA is active.

Employee eligibility for a SIMPLE IRA provides the employer with more discretion. An employee qualifies if they have earned at least $5,000 in compensation during any two preceding years and are reasonably expected to earn at least that much in the current year. This higher compensation threshold often excludes many part-time or temporary workers who might qualify under SEP IRA rules.

Contribution Rules and Limits

The funding methods for SEP and SIMPLE IRAs directly impact business cash flow and participant savings. A SEP IRA is funded exclusively by the employer, as employees are not permitted to make their own contributions. Contributions are also discretionary, meaning an employer can choose to contribute a large amount one year and nothing the next, offering flexibility based on the business’s profitability.

Employer contributions must be a uniform percentage of compensation for every eligible employee. For instance, if the owner contributes 10% of their own compensation, they must do the same for all eligible employees. For 2025, contributions for any individual are limited to the lesser of 25% of their compensation or $70,000. The maximum compensation that can be used for this calculation is capped at $350,000.

A SIMPLE IRA operates on a dual-contribution system involving both employee and employer funding. Employees contribute to their own accounts through payroll deductions, called elective deferrals. For 2025, employees can defer up to $16,500. Individuals aged 50 and over can make additional catch-up contributions of $3,500, while a higher limit of $5,250 applies to participants aged 60 to 63.

Unlike the discretionary contributions of a SEP IRA, employer contributions to a SIMPLE IRA are mandatory each year. The employer has two choices for their contribution. The first is a dollar-for-dollar match of employee contributions, up to a maximum of 3% of the employee’s compensation. The second is a nonelective contribution of 2% of compensation for every eligible employee, regardless of whether they contribute.

Plan Establishment and Deadlines

To set up either plan, an employer uses a model document from the IRS or a prototype plan from a financial institution. For a SEP IRA, the document is IRS Form 5305-SEP. This form serves as the formal written agreement for the plan and is not filed with the IRS.

The deadline for establishing a SEP IRA offers considerable flexibility. A business can set up and fund a SEP IRA for a specific tax year up until the due date of its federal income tax return, including extensions. This allows business owners to make retirement funding decisions after the financial results for the year are finalized.

Setting up a SIMPLE IRA requires different documentation. The plan must be established using either Form 5304-SIMPLE or Form 5305-SIMPLE. These forms are kept by the employer as the governing plan documents.

The deadline for establishing a new SIMPLE IRA is much stricter. A SIMPLE IRA must be established by October 1 of the year for which contributions will be made. This earlier deadline means a business cannot wait until after the year has ended to implement a SIMPLE IRA for that year.

Ongoing Administrative Responsibilities

For a SEP IRA, ongoing responsibilities are minimal. There is no annual filing requirement with the IRS or the Department of Labor. The main annual task is to determine if a contribution will be made for the year and, if so, to calculate the proper amount for each eligible employee and deposit the funds.

The deadline for depositing these employer contributions is the due date of the employer’s tax return, including extensions. Beyond funding, the employer must provide a copy of the Form 5305-SEP and its instructions to all eligible employees. An employer with a SEP IRA is also permitted to maintain other types of retirement plans.

The administrative tasks for a SIMPLE IRA are more involved. The most significant recurring duty is the annual employee notification. Each year, before the employee’s 60-day election period (typically November 2 to December 31), the employer must provide a detailed notice to all eligible employees. This notice describes the employee’s opportunity to make or change their salary deferral election and explains the employer’s contribution choice for the upcoming year.

Depositing contributions for a SIMPLE IRA follows a different schedule. Employee elective deferrals must be deposited no later than 30 days after the end of the month in which they were deducted from payroll. Employer matching or nonelective contributions must be made by the business’s tax filing deadline, including extensions.