The Internal Revenue Service allows a person to participate in an employer-sponsored SEP-IRA and a qualified 401k retirement plan simultaneously. In the context of contributions, the IRS views both a SEP-IRA and a 401k as defined contribution retirement plans, meaning the IRS limits the total amount that an employer and employee may contribute to a single employee’s combined retirement accounts to a specific dollar figure. The IRS adjusts this limit as needed to reflect changes in the cost of living.
A SEP-IRA plan consists of individual retirement accounts an employer establishes on behalf of eligible employees. An employee is generally eligible to benefit from his employer’s plan if he is at least 21 years old, earns at least $550, as of 2011, and received compensation from the employer sponsoring the SEP-IRA plan in a minimum of three of the five years preceding his enrollment in the retirement plan. The IRS does not mandate that an employer contribute to the SEP-IRA accounts of its employees, meaning an employer makes contributions solely at its discretion. If an employer chooses to make a contribution to its retirement plan, the IRS requires the employer to contribute to the IRA account of every employee who performed services for the employer during the year for which the employer makes contributions, even if the employee is deceased when the employer makes its contributions.
SEP-IRA Contribution Limits
Although the IRS only allows an employer to contribute to an employee’s SEP-IRA, deposits made into a person’s account are 100 percent vested, meaning an employer’s contributions become the property of the receiving employee at the time of deposit. As of publication, the IRS allows an employer to contribute up to 25 percent of an employee’s compensation or $49,000, whichever is less, into a person’s SEP-IRA.
Similar to a SEP-IRA plan, a 401k consists of the individual savings accounts set up for each of an employer’s eligible employees. In general, an employee is eligible to participate in a 401k plan after turning 21 and working at least 1,000 hours in the year preceding his enrollment in the plan. An employee participates in a 401k if he chooses to defer part of his salary into his retirement account. The IRS does not require an employer to make contributions to the 401k accounts of its employees, but the employer’s 401k plan document may permit matching or nonelective employer contributions.
401k Contribution Limits
As of publication, the IRS allows an employee under age 50 to contribute the lesser of 100 percent of his compensation or $16,500 into his 401k account. The IRS allows an employee age 50 or above a catch-up, or an additional deferral of $5,500 of his salary.
Combined Contribution Limits
As of publication, the IRS limits the total amount that an employer and employee may contribute to a single employee’s SEP-IRA and 401k accounts to the lesser of 100 percent of the employee’s compensation or $49,000 per year. The IRS does not include a permissible catch-up in its calculation of maximum combined contribution limits.
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