On the Your Money, Your Wealth® podcast episode #218, Joe Anderson, CFP® and “Big Al” Clopine, CPA answer this question from Ross in Ventura, CA: “I enjoy watching you characters on You Tube. Does a Sep-Ira have the same protection through ERISA as a 40lK?”

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In the world of retirement accounts, the SEP IRA and 401(k) are two of the most popular options for business owners and employees alike. Both offer tax advantages and help individuals save for their golden years. However, there is a common question that often arises: Does a SEP IRA have the same ERISA protections as a 401(k)?

First, let’s define what ERISA is. The Employee Retirement Income Security Act of 1974 was created to protect employees’ retirement assets, and it sets minimum standards for private sector retirement plans. ERISA covers a wide range of topics, including reporting and disclosure requirements, fiduciary standards, and vesting rules. Any employer-sponsored plan that falls under ERISA is subject to these regulations.

Now, let’s compare the protections afforded by ERISA for SEP IRAs and 401(k)s. While both types of plans are allowed under ERISA, they do differ in some key areas.

401(k) plans are subject to stricter regulations under ERISA. For instance, employers that offer a 401(k) are required to undergo annual audits to ensure that the plan is in compliance with ERISA regulations. Additionally, 401(k) plans generally have higher contribution limits than SEP IRAs, meaning participants can save more money each year. Finally, 401(k) plans are often subject to more stringent nondiscrimination testing, which helps prevent discrimination in favor of highly compensated employees.

On the other hand, SEP IRAs are generally easier to administer than 401(k) plans. There are no annual audits required, and the plan is not subject to the same nondiscrimination testing. Moreover, SEP IRAs offer more flexibility to both employers and employees in terms of contribution limits and investment options.

So does a SEP IRA have the same ERISA protections as a 401(k)? The short answer is no. While both types of plans are allowed under ERISA, 401(k) plans are subject to more stringent regulations and offer greater protection to participants. However, SEP IRAs are still a valuable retirement savings option for many, particularly for self-employed individuals and small business owners.

In conclusion, before choosing between a SEP IRA and 401(k) plan, it is important to understand the differences in ERISA protections and regulations. Employers and employees should carefully consider which plan best suits their needs and goals for retirement savings.