SEP IRA and Sole Proprietor 401(k) Plan Comparison

Sole proprietor 401(k) plans, or Uni-Ks, generate a lot of interest. Sole proprietors and self-employed individuals such as consultants, accountants, and freelancers in particular may want to know how this retirement savings option compares with a SEP IRA.

Here are some of the most frequently asked questions, plus answers and information to use in discussions with your clients:

Would I be able to contribute more to a Uni-K than to a SEP IRA?

Although contribution limits for a Uni-K are potentially greater than those for a SEP IRA, not every small business owner will benefit from them.

The following contribution summary is based on 2023 IRS limits.

Employer contributions, such as matching or profit sharing, up to 25% of compensation Employer may contribute up to 25% of employee's compensation, to a maximum of $66,000
As the employee: may defer up to 100% of compensation, to a maximum of $22,500  
Maximum annual contribution from both sources is the lesser of 100% of compensation or $66,000, not including catch-up contributions Maximum annual contribution is the lesser of 25% of compensation or $66,000
Catch-up contributions of $7,500 for those 50 and older**  

There are additional considerations that may help determine whether a Uni-K will be advantageous for a particular client. Here are three of them:

  • What is the client's annual compensation? If the client's annual income is over $330,000 this year, a Uni-K confers no advantage over a SEP IRA, since $66,000 is the maximum contribution allowed in each plan type for this year.
  • Can your client afford to contribute more than 25% of his or her compensation? If your client's total contributions as both employer and employee will not exceed 25% of compensation, then he or she will not benefit from the higher contribution limits of the Uni-K, since both plans allow contributions up to the 25% level.
  • Is your client unincorporated? If your client is not incorporated, he or she must first factor in self-employment payroll taxes and deduct employer contributions from compensation, which effectively reduces the maximum contribution percentage.

Are there tax consequences that I should be aware of with a Uni-K?

In addition to self-employment taxes for unincorporated individuals, there are tax considerations for incorporated individuals.

Employer contributions and salary deferrals may result in different tax consequences for your clients. Clients should consult a tax advisor to determine the most advantageous arrangement, given their individual situation.

Are loan features available in Uni-Ks and SEP IRAs?

  • SEP IRA: These plans do not allow loans.
  • Uni-K: Loan features are available in some but not all Uni-K plans. If the plan allows, an employee may borrow from his/her account tax free and penalty free as long as the loan is repaid on time – generally within five years. There are rigid IRS loan limits and repayment requirements. There may be a small administrative fee. Some plans may charge a flat loan-initiation fee (e.g., $100 per loan).

Are there setup fees and minimum initial contributions for Uni-Ks and SEP IRAs?

  • SEP IRA: The Fidelity Advisor SEP IRA has no setup fees or minimum initial contributions.
  • Uni-K: Fees and minimums vary from plan to plan. Most Uni-K service providers charge a one-time setup fee, which can be significant. A substantial minimum initial deposit may be required.

How do administration costs and paperwork requirements for the two plans compare?

  • SEP IRA: One of the well-recognized advantages of a SEP IRA is the ease and economy of setup and account maintenance. With a SEP IRA your clients do not have to file annual reports with the IRS or Department of Labor. Administration procedures are relatively simple, and there are no administration fees. The Fidelity Advisor SEP IRA has a minimal annual account maintenance fee of $15.
  • Uni-K: A Uni-K is more involved and costly to administer and maintain than a SEP IRA. There is usually an initial plan setup fee and an annual account maintenance fee. In addition, an annual IRS Form 5500 filing is required once plan assets exceed $250,000.

    More important to consider are the more complicated plan documents and recordkeeping procedures required to establish and maintain a Uni-K account. A plan and trust document is required, detailing how the plan is operated.

    There must also be a trustee to hold the account assets on behalf of the employer. The trustee must follow the plan's terms in accordance with ERISA, IRS, and DOL requirements. Your client needs to weigh realistically whether to act as his or her own trustee. He or she can hire a trustee or recordkeeper, but that adds to the cost.

What if my business grows and I need to hire additional help?

  • SEP IRA: It's easy with a SEP IRA. Adding employees does not affect the administration or cost structure of the plan. Each new hire simply signs up for the plan.
  • Uni-K: The possibility of expanding the workforce may be your client's most important consideration. Recall that this plan may work to your client's advantage only when the owner and the spouse are the sole employees.

    If even one additional employee is hired, the Uni-K becomes a traditional 401(k) plan with multiple added layers of administrative, fiduciary, and financial responsibility. For example, the owner may be required to comply with mandatory nondiscrimination tests and meet certain other requirements.


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