A 408 (k) is not the same as a Simplified Employee Pension (SEP). The SEP plan is a retirement plan that allows employers or self-employed individuals to contribute certain amounts of money to an employee’s account. It must be part of a written arrangement and can be established by a model, a prototype document or an individually designed document. Proposed Income Tax Regulations state that an employer must execute a written instrument within a set period of time in order to make deductible contributions. The 408 (k) is a similar retirement plan used by employees to contribute money to their SEP accounts with pre-tax dollars. This reduces their current year’s net income. The 408 (k) is the code that encompasses the SEP plan.
To create a functional SEP plan, the plan must follow the regulations set by the 408 (k) section as well as specific requirements of section 415 and 416 of the Internal Revenue Code (IRC). This means that SEP plans are part of 408 (k) plans. Any eligible employee is allowed to have a SEP plan. Requirements for eligible employees are that they must be at least 21 years of age or older, they must have served their employers for three of the previous five years, and they must have received at least $450 in compensation from the employer from the previous year of work. “Service” is defined as any form of work for the employer for any period of time, regardless of the length of the time period.