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March 3, 2009

SEP IRA Vs SIMPLE IRA – Quick Reference Guide– 2008 and 2009


Small business owners, who like the simplicity and low administrative costs associated with simplified employee pension (SEP) IRAs and savings incentive match plan for employees of small employers(SIMPLE) IRA plans, often find it hard to choose between the two. An understanding of the features and benefits of these plans can help to make the choice easier. This Appleby Quick Reference Guide provides a comparison of some of the key features and benefits of these plans.

Features and Benefits
Eligible Employer
Age Requirement
Service  and compensation requirement
Salary deferral allowed
Maximum contributions allowed for employee
Any employer. Employers who use the services of leased employees or maintain any other retirement plan cannot use the form 5305-SEP, but may use a prototype or individually designed SEP
Can exclude employees under age 21
Must include employees who worked at least 3 of the 5 preceding years.  
A year of service is any work performed during the year, however short a period.
Can exclude employees who earn less than $500 during the year. For 2009, this is increased to $550.
Not for 5305-SEP.  For 2008, up to $15,500 + catch-up of $5,000 may be allowed under a Salary deferral SEP (SARSEP). For 2009, the limits are $16,500 + $5,500 catch-up . Note: As of 01/01/97, new SARSEPs may not be created.
Lesser of 25% of employee’s compensation or $46,000 for 2008 and $49,000 for 2009
Any employer, providing the employer had no more than 100 employees with $5,000 or more in compensation during the preceding year.
Generally, the SIMPLE IRA must be the only plan maintained by the employer
Must include employees who received at least $5,000 in compensation during any 2 preceding calendar years (whether consecutive or not) and are reasonably expected to receive at least $5,000 in compensation during the calendar year
Yes. Up to $10,500 + catch-up of $2,500 for 2008;  $11,500 plus catch-up of $2,500 for 2009
$10,500 deferral + employer match of up to 3% of compensation+ catch-up for 2008. For 2009, it is $11,500, plus catch-up of $2,500, plus employer matching contribution of up to 3% of compensation
Deductible contribution limit
Limitation on Compensation
Vesting of Contributions
Deadline to Establish Plan
Deadline for making contributions
25% of eligible compensation of all eligible employees
Compensation cap of $230,000  for 2008 applies. For 2009, the compensation cap is $245,000
100% immediate vesting
Employer’s tax filing deadline, including extensions
Employers tax filing deadline, including extensions
Up to the SIMPLE IRA contribution limits. Not to exceed  allowed contribution limits
Compensation cap applies only to employer 2% non-elective contribution
100% immediate vesting
October 1. Except for businesses that are created after October 1, for which the plan must be established as soon as is administratively feasible
Salary deferrals- within 30 days, following the end of the month to which the deferral applies. 
Employer contributions –employer’s tax filing deadline, including extensions
Nondiscrimination testing
5500 filing
Administrative cost
Notable notes
Gives business that has not established a profit pattern or one that experiences fluctuation in profits, flexibility due to discretionary contribution feature
Employers often overlook the annual notification requirements that apply to SIMPLE IRAs, resulting in them being subject to penalties
Ideally suited for …
Employers who are looking for a plan in which contributions are immediately 100% vested is easy/inexpensive to administer, has a discretionary feature for contributions. Also advantageous for employers who do not mind the fact that employees can take their contributions at anytime
Employers who are looking for a plan in which contributions are immediately 100% vested, is easy/ inexpensive to administer, has a mandatory feature for employer contributions,  allows employees to share the cost of funding their accounts. Also advantageous for employers who do not mind the fact that employees can take their contributions at anytime
Disclaimer: Appleby Quick Reference Guidescannot be used as substitution for tax advice. Individuals must consult with their tax professionals for assistance with determining which plan is suitable for their businesses.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.


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