Small business owners often want to help employees save for retirement while managing the cost and administration of a workplace plan. Two options that may be worth comparing are the Simplified Employee Pension, or SEP IRA, and the Savings Incentive Match Plan for Employees, commonly known as a SIMPLE IRA.
Both use individual retirement accounts, but they operate differently.
How a SEP IRA works
A SEP IRA is funded by employer contributions. Employees generally do not make salary-reduction contributions to a SEP under the standard arrangement. The employer decides whether to contribute for a year, subject to the plan's rules and applicable limits.
For 2026, the SEP contribution limit is generally the lesser of 25% of an eligible employee's compensation or $72,000. Special calculation rules apply to self-employed individuals, and compensation limits also matter.
Employers generally must apply the plan's contribution formula consistently to eligible employees.
How a SIMPLE IRA works
A SIMPLE IRA allows eligible employees to contribute through salary reductions. The employer must generally make either a matching contribution or a nonelective contribution under the plan rules.
For 2026, the standard SIMPLE IRA salary-reduction limit is $17,000. Eligible participants may have additional catch-up contribution opportunities, including a higher limit for certain participants aged 60 through 63.
What should a small business compare?
A SEP IRA may be attractive when an owner wants flexibility over whether to contribute in a given year. A SIMPLE IRA may be useful when a business wants employees to contribute directly from their paychecks.
However, the employer contribution requirements, employee eligibility rules, annual notices, deadlines, and administrative obligations differ. The best choice depends on workforce size, cash flow, compensation, and the owner's retirement goals.
Don't overlook the details
Business owners should compare the total contribution cost across eligible employees, not just the amount the owner hopes to save personally. They should also check whether another retirement plan is already in place, because overlapping plan rules can affect contribution limits.
Bottom line: SEP and SIMPLE IRAs can help small businesses establish retirement savings arrangements, but their contribution structures and obligations are different. Owners should compare the rules before adopting a plan.
This article is for educational purposes and is not individualized tax or legal advice.
