SEP, SIMPLE, 401(k)—What’s the Right Plan for Your Business?

You understand the importance of offering retirement benefits, but how do you select the right option for your small to mid-size business? Morgan Stanley at Work spotlights three common small-business retirement solutions so you can select the right choice for your business.

Only a little over half of private sector workers in the United States are covered by an employer-sponsored retirement plan, and few workers save without one.1 Workers are understanding the importance of retirement savings, and this topic is of increasing concern for legislators.  As a result, many states are mandating that employers offer some type of retirement savings plan, and workers are looking for job opportunities that offer this type of benefit.

According to a recent report, small firms have cited several main reasons for not offering a retirement plan.2 Some businesses claim they are not firmly established with consistent cash flow to offer a plan.  They are worried about the potential administrative responsibilities and costs associated with setup, and the theory that workers would prefer cash compensation or better health insurance in lieu of retirement benefits. However, with increasing pressure from the government and workers to offer a retirement solution, it is important to be versed in the options available for your small business. You may be surprised to find that offering a retirement solution may not be as costly and difficult to set up as you may think.

Small businesses have several options to choose from when it comes to retirement plan benefits for their employees. This article is meant to clear up confusion about the various retirement options, whereby we will provide an overview of each type of plan and include a comparison chart outlining key features so you can make a more informed decision about the solution that best fits your business needs.

The Retirement Landscape

The three most common small business retirement solutions are:

  • 401(k) 


A 401(k) plan gives employees a tax break on money they contribute. Contributions are automatically withdrawn from employee paychecks and invested. The investment options within the plan are selected by you as the employer or delegated fiduciary, and from that predetermined selection, an employee may choose the funds for their individual 401(k) account. Many companies offer what’s called a 401(k) match, in which the employer matches, up to a specified percentage, the employee's contribution as a benefit and incentive for employees to increase their own contributions. Employer contributions in 401(k) plans are optional.


Simplified Employee Pension (SEP) and Savings Incentive Match Plan for Employees (SIMPLE) IRAs are retirement plans that allow employees to save for retirement on a pretax basis. In comparison to a 401(k), SIMPLE/SEP IRAs have fewer plan design options and features but are easier to set up and administer and offer a cost-effective way for a business to start a retirement plan. However, employees are responsible for managing their own investments in a SIMPLE/SEP IRA, so it may be a good idea for them to work with a Financial Advisor who can discuss investment choices as well as savings strategies.

2022 401(k) SEP IRA SIMPLE IRA
Who is it For Any type of public or private company Generally any type of employer except Nonprofit organizations Employers with 100 or fewer employees earning $5000 or more from the Employer in the preceding year.
Who Can Contribute Employee and employer Employer Employee and employer
Mandatory Employer Contribution No

Employer is not required to contribute.

If employer makes a contribution then needs to contribute to all eligible employees.

Contribution Limits
for Tax Year 2022
  • Employees can make tax-deferred contributions up to $20,500
  • Employer and employee maximum tax-deferred contributions combined are $61,000 or 100% of the employee’s total compensation (whichever is less)
  • $6,500 catch-up amount for those who are 50+
25% of an employee’s compensation, or $61,000, whichever is less.

Salary deferral contributions of 100% of earned income up to $14,000 plus $3,000 catch-up contributions for employees who are 50+.

Employer match of deferrals dollar for dollar up to 3% of employee compensation or net earnings from self-employment or 2% nonelective contribution.

Vesting Timing for Employer Contributions Multi-year options or immediate Immediate Immediate
Access to Funds
before age 59 1/2
Penalty-free loans or 10% penalty for early withdrawal. 10% penalty tax for withdrawal before age 59½. 25% penalty tax for withdrawing before age 59 1/2 and within first 2 years of participating; 10% thereafter.
Loans Yes No No
Roth Options Yes No No


While you may see the value in offering a retirement solution for your employees, you may still have concerns about costs. There may be tax incentives for your business when you set up a retirement solution. If you are worried about the time spent administering the plan, some plans come with preselected fund lineups and service providers to oversee the performance and complete administrative tasks and responsibilities, leaving you more time to focus on running your business.

There are pros and cons of each retirement solution type, but a 401(k) may offer the most flexibility for your firm. Contribution limits are higher than SIMPLE IRA deferral limits, and you can incentivize your employees to save even more by providing a match. Furthermore, a match provides your company with a competitive advantage: According to the U.S. Bureau of Labor Statistics National Compensation Survey, of the employers who offer 401(k) plans, over half offer a match.2 In the current job market, benefits are becoming increasingly important to attract and retain top talent: 78% of employees are more likely to stay with an employer because of their benefits.3

Morgan Stanley at Work offers small-business 401(k) services to help you and your employees reach their retirement plan goals. Furthermore, working with a provider like Morgan Stanley gives you access to a Financial Advisor, who can craft a retirement plan that meets the needs of your company and your employees, with diversified investment options to suit varying needs.

As a small-business owner, you can help improve the financial future of your employees by providing retirement benefits and leveraging the plan as an effective tool for attracting and retaining industry talent. If you already have a SIMPLE IRA program and you are interested in converting the plan into a 401(k), the election must be done by October for the new plan to take effect in the new calendar year.

Talk to a Morgan Stanley Financial Advisor, and your legal and tax advisors about your options, and what type of retirement solution makes the most sense for your business and employees.

Morgan Stanley at Work helps build financial confidence through thoughtful education to help individuals embrace their tomorrow, today.