408(k) Plan vs. 401(k) Plan: What’s the Difference?

408(k) Plan vs. 401(k) Plan: An Overview

408(k) and 401(k) are sections of the Internal Revenue Code that outline employer-sponsored retirement plans. Both sections provide guidelines for plans that give employees a means of saving for retirement in a special account.

That’s where these two retirement savings plans diverge. While section 401(k) has become synonymous with a widely available retirement savings vehicle, section 408(k) sets the guidelines for what is called the simplified employee pension (SEP) IRA.

408(k)s

A simplified employee pension plan is an individual retirement account and/or annuity that meets the contribution requirements set by the Internal Revenue Code. It can be created by a business of any size. Only the employer can contribute to the plan, and every employee receives the same percentage of their earnings as contribution amounts.

Those who are self-employed may contribute to SEP IRAs. Employers can also make tax-deductible contributions on behalf of eligible employees—including the business owner—to their SEP IRAs. The employer is allowed a tax deduction for plan contributions that do not exceed the statutory limit.

401(k)s

A 401(k) is the most common type of retirement savings account offered. It is an employer-sponsored savings plan in which the employer and employee can make contributions. Employers offering a 401(k) plan may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings in a 401(k) plan accrue on a tax-deferred basis in traditional 401(k)s and a potentially tax-free basis in a Roth 401(k).

Key Differences

Here are some features that distinguish the 408(k) SEP IRA from the 401(k):

• In general, only employers can contribute to an SEP IRA: Unlike a 401(k), employee contributions are not permitted as part of SEP contribution limits.
• Some SEP IRAs permit separate, personal IRA contributions: If your company’s SEP IRA plan permits it, employees can make non-SEP IRA contributions to the same account, up to $7,000 for 2025 (and 2024), plus an additional $1,000 for those age 50 or older.
• Employer contributions under an SEP IRA must be equal: Each eligible employee must get the same percentage of the salary contributed to the plan.
• Employees, not employers, manage an SEP account: Overall, 401(k) plans are a bit more complex than SEPs, with many investment options set up by the employer (or its plan managers), including mutual funds that contain stocks, bonds, and commodities. With an SEP IRA, the employer does not set up investment options. Instead, the employee manages the SEP IRA, choosing their investments. Employers essentially put money (not real property, which is forbidden) into employee individual retirement accounts (IRAs). This saves the employer from paying administration costs as they would with a 401(k).
• Self-employed contributions are tax-deductible: Only self-employed participants can deduct a certain amount of their contributions to their retirement funds.
• 408(k)s have minimum earnings for eligibility: The minimum compensation threshold is $750 for 2025 and 2024.

Similarities

• Maximum allowable compensation: No matter how much an employee earns, the annual compensation limit for determining contributions is $350,000 in 2025.
• Contribution limits: Employers can contribute as much as 25% of an employee’s salary but no more than $70,000 for 2025 ($69,000 for 2024). However, no catch-up contributions are allowed in SEP IRAs, as they are funded only with employer contributions.
• Contributions are not taxed: Employer contributions to your plans are not taxed. You pay taxes on withdrawals.
• Eligibility: SEP IRAs are available for employees of companies of any size or those who are self-employed and would typically not have access to a retirement plan.
• Contribution deadlines follow IRA deadlines. For example, 2025 contributions to an SEP IRA may be made until April 15, 2026. With a 401(k), the deadline is the calendar year (i.e., Dec. 31) for individual contributions, but April 15 for employer contributions.
• Penalty for early withdrawal. Both accounts are inaccessible without a penalty until the account holder reaches the qualifying age of 59½.

The Bottom Line

408(k) and 401(k) plans are both retirement savings plans, but they have significant differences and similarities. Differences include who can contribute, who manages the account, and whether catch-up contributions are allowed.