408(k) Plan

What Is a 408(k) Plan?

A 408(k) plan is a Simplified Employee Pension, or SEP, arrangement described in section 408(k) of the tax code. In practical personal-finance terms, it is the formal plan framework behind the more familiar SEP IRA. The employer adopts the plan, and contributions are made into IRA accounts for eligible employees.

The distinction matters because readers often hear SEP IRA as if it were only an account label. The 408(k) plan concept reminds them that SEP saving begins with an employer retirement plan arrangement, even though the assets end up in IRA accounts.

Key Takeaways

• A 408(k) plan is the tax-code framework for a Simplified Employee Pension.
• It funds retirement saving through SEP-IRA accounts for eligible employees.
• Employer contributions, not employee salary deferrals, are the core funding method.
• The structure is designed to be simpler than many other workplace plans.
• It is most useful to compare with other small-business arrangements like a SIMPLE IRA or a Solo 401(k).

How a 408(k) Plan Works

The employer adopts a SEP arrangement and contributes to traditional IRA accounts established for eligible employees. Because the underlying accounts are IRAs, the investment and distribution side can look familiar. But the decision to contribute, and how much to contribute, happens at the employer-plan level rather than as an employee elective deferral.

If you need the current year's SEP contribution figures, see the current financial planning tax reference guide.

This structure is why the 408(k) plan matters as more than a code citation. It explains why a SEP can feel administratively lighter than other employer retirement plans while still remaining a real workplace retirement arrangement.

408(k) Plan Versus SEP IRA

The easiest way to understand the relationship is that the 408(k) plan is the legal plan structure and the SEP IRA is the participant account that receives the contributions. In day-to-day conversation, people often use SEP IRA for both ideas. But when plan mechanics matter, the distinction becomes useful.

The employer adopts the 408(k) arrangement. The employee or owner then holds the contribution in a SEP-IRA account. That split is what makes the plan both an employer retirement benefit and an IRA-based account system.

How a 408(k) Plan Fits Small-Business Retirement Design

A 408(k) plan is often attractive because it keeps setup and administration relatively straightforward while allowing meaningful employer retirement contributions. That can make it appealing for self-employed people and small businesses that want more simplicity than a full qualified plan but still want a real workplace retirement benefit.

The comparison point is often a SIMPLE IRA or Solo 401(k). The right choice depends on who is contributing, how much flexibility the employer wants, and whether the business values simplicity more than elective-deferral features.

The Bottom Line

A 408(k) plan is the formal SEP plan structure that lets an employer contribute to SEP-IRA accounts for eligible employees. It is best understood as the plan-level framework behind the more familiar SEP IRA account.