Changing a SEP IRA to a 401(k) Plan: A Guide for Small Business Owners

Compare the plans: SEP IRAs are low-cost and easy to administer, but they don’t have the features and flexibility that come with a 401(k) plan.

Explore the rules: In general, employers can’t maintain a SEP and a 401(k) in the same year. In cases where both are permitted, there are certain limitations.

Make the change: Terminating a SEP doesn’t require IRS notification and employees can roll SEP IRA assets into a newly established 401(k) at any time.

A SEP (Simplified Employee Pension) IRA is a low-cost way for employers to offer retirement benefits with minimal IRS reporting. But as your workforce expands or becomes more diverse, the limitations of a SEP IRA can make it harder to meet employee expectations and compete for talent.

Key questions small business owners should ask

Exploring the answers to these frequently asked questions about a SEP IRA or 401(k) plan may help you make the right decision for your business.

How do SEP IRAs and 401(k) plans differ?

A SEP IRA is a cost-effective option for small business owners who want to make employer contributions to employee retirement accounts. They’re simple to administer and don’t require the same discrimination testing that 401(k) plans do (with the exception of safe harbor 401(k) plans). Employers don’t have to make any official commitment to annual contributions to the account, and contribution limits are high compared to a SIMPLE IRA or Roth IRA.

Limitations of SEP IRAs

The limitations on a SEP IRA can impact its effectiveness as a retirement savings vehicle for employees and the benefits of offering the plan for the employer:

SEP IRA plans only allow the employer to make contributions to employee accounts—employees cannot contribute.
Employers who contribute to their own account are also required to make proportional contributions for each eligible employee.
Roth contributions are not allowed, meaning employers cannot pay taxes on contributions now in order to take distributions tax-free in retirement.
100% of funds contributed to the plan are immediately vested.

Benefits of switching to a 401(k)

For growing small businesses, a 401(k) offers significantly more flexibility in plan design, employee participation, and long-term scalability.

Compare 2026 retirement plan contribution limits

	Type of retirement plan
	401(k) plan	Individual(k) plan	SIMPLE IRA	SEP IRA
Employee contribution limits	Up to $24,500	Up to $24,500	Up to $17,000	Not allowed
Employer contribution	Flexible, up to 25% of compensation1	Flexible, up to 25% of compensation1	Mandatory contribution: generally, a 100% match on deferrals up to 3% of compensation OR a 2% contribution to all eligible employees2	Flexible, up to 25% of compensation1
Catch-up contributions (in addition to max employer + employee limits)	Up to $8,000 for those aged 50+ OR an increased catch-up of $11,250 for those aged 60-63	Up to $8,000 for those aged 50+ OR an increased catch-up of $11,250 for those aged 60-63	Up to $4,0003 for those aged 50+ OR an increased catch-up of $5,250 for those aged 60-63	Not allowed

1 25% of compensation for employer tax deduction.

2 Employer match may be reduced to as low as 1% for any two out of five-year period.

3 Potential higher catch-up limits for participants in plans maintained by specified small employers.

Note: Employee contributions are not allowed in profit sharing plans and SEP IRAs.

Compare tax advantages

Both plans offer potential tax savings to plan sponsors through tax credits and tax-deductible employer contributions. However, employees are unable to make contributions to a SEP IRA and are unable to take advantage of the tax benefits that are available with a 401(k).

Can business owners contribute to a SEP IRA and a 401(k) in the same year?

Generally, no. If they maintain a 5305-SEP (the most common type), an employer cannot offer any other qualified plans. An employer offering either a prototype SEP or individual designed SEP can offer both types of plans in the same year. When both a SEP and a qualified plan can be maintained by the employer, there are additional considerations.

If both a 401(k) plan and a SEP IRA are offered by the same business, business owners can contribute to both plans simultaneously, however contributions between the two plans are limited to the maximum of 25% of compensation or up to $72,000 (whichever is lesser). Top Heavy testing does need to be coordinated between the two plans.

If a business owner has a SEP for their business and is participating in a 401(k) as an employee of a completely unrelated business, there is no coordination of limits.

How do I transition from a SEP IRA to a 401(k) plan?

Getting a small business 401(k) started and rolling SEP IRA funds into the new plan is simple when you partner with Ascensus. Our installation process is focused on the needs of small business owners with a dedicated representative who is there to guide plan sponsors along the way. From there, employers have access to our customer care team who is available to answer any setup or plan questions from both plan sponsors and employees.

What is the deadline for rolling over a SEP IRA to a 401(k) this year?

There are no deadlines involved in rolling over funds from a SEP IRA to a 401(k). The rules for rolling over a traditional IRA into a 401(k) are generally the same for a SEP IRA. Employees can request a distribution from a SEP IRA at any time, and if it’s performed as a rollover into another qualified plan like a 401(k) or traditional IRA there will be no tax penalty.

All employees have the choice between taking the account assets as a distribution (with any accompanying penalties, depending on their age), or rolling the funds into another plan (either the newly established 401(k) or their own individually established traditional IRA).

It’s also not a requirement to notify the IRS about the termination of a SEP IRA—employers should simply notify the plan’s administrator that they wish to terminate the plan and direct them on what they’d like to do with their assets.

Ready to get started?

Contact our team at 833-893-3233, option 1 and we’ll help you find the best fit for your small business.