---
title: Can We Convert A SEP-IRA To A 401(k) Plan?
description: Got a SEP-IRA? Wondering how to move to a 401(k) instead? We'll tell you how to do it! But first, we'll look at SEP IRAs vs 401(k) plans.
---

[Uniglobal Blog | ERISA, Compliance, and Administration ](https://blog.uniglobal.com)

# [Can We Convert A SEP-IRA To A 401(k) Plan?](https://blog.uniglobal.com/can-we-convert-a-sep-ira-to-a-401k-plan)

 Written by [Uniglobal](https://blog.uniglobal.com/author/uniglobal) | May 6, 2021 2:10:00 PM

Got a SEP-IRA? Wondering how to convert it to a 401(k)? The short answer is: you can't. However, you *can* discontinue the SEP IRA and start a new 401(k) plan and we'll tell you how to do it! But first, a few words on SEP IRAs vs 401(k) plans:

## SEP-IRA

Employers offering SEP IRAs for their employees realize the value of saving for retirement. A SEP IRA is easy to establish with a minimal amount of administrative work. For these reasons it can be an attractive option for jump starting retirement savings.

The downside of offering a SEP-IRA is there is very little room for customization.

### Establishing A SEP-IRA

- **Who May Establish?** 
    - Any US business may establish a SEP, regardless of size
- How To Establish? 
    - The easiest way to establish a SEP is by adopting the [IRS Form 5305-SEP](https://www.irs.gov/pub/irs-pdf/f5305sep.pdf).  
          - Generally if you adopt a SEP by way of Form 5305-SEP, you cannot sponsor any other retirement plan in this or any other company you own within a controlled or affiliated service group, or other such arrangement such as management organization

### SEP-IRA Contributions

Within a SEP-IRA only Employer contributions are permitted. In addition, the rules governing those contributions are not as flexible as they would be in a 401(k) Plan.

- **Types of Contributions** 
    - Employer contributions only, no employee contributions are permitted
- **Contribution Rate (formula)** 
    - Uniform; the same percentage of compensation for every employee must be used
- **Vesting Schedule ** 
    - 100% vested immediately; no other schedule is permitted

### SEP-IRA Distributions

A SEP-IRA has specific options for participant distributions. 

- **Rollovers** 
    - Participants may rollover their SEP IRA to most IRAs or qualified plans (like a 401(k) or 403(b))
- **Loans** 
    - Not permitted
- **Withdrawals** 
    - Contributions and earnings can be withdrawn at any time, subject to the general limitations imposed on traditional IRAs

 

## 401(k) Plan

Employers looking for a more flexible custom option for their retirement goals should consider establishing a 401(k) plan. 

### Establishing A 401(k) Plan

- **Who May Establish?** 
    - Any US business, regardless of size or parent company location
- How To Establish? 
    - You'll need to design the provisions of your specific plan and adopt a plan document - [we can help with this!](https://www.uniglobal.com/request-for-proposal/)

### 401(k) Plan Contributions

You'll have much more flexibility with contributions in a 401(k) over a SEP-IRA. To start, employees are permitted to contribute. Here are a few highlights around contributions and their options within a 401(k) plan:

(Note: these are just a few of many options, [connect with us](https://www.uniglobal.com/connect/) for more insight!) 

- **Types of Contributions** 
    - Employer - discretionary or required (depending upon design, such as a [Safe Harbor Plan](https://knowledge.uniglobal.com/design/safe-harbor/how-to-select-the-right-safe-harbor-plan-design))
    - Employee - pre-tax elective deferrals and Roth (after-tax) contributions are permissible
- **Employer Contribution Formula** 
    - Pro Rata (same % to all)
    - Integrated with Social Security-based - sometimes referred to as Permitted Disparity
    - Age-Weighted, or
    - Class-Based (also called Cross-Tested or [New Comparability, a favorite of ours!](https://blog.uniglobal.com/everything-you-need-to-know-about-new-comparability-and-why-we-love-it))

-  
- **Vesting Schedule ** 
    - Employee and Rollover contributions are always 100% vested immediately.
    - Employer Contributions 
          - Employer Discretionary Contributions - Typical Schedules 
                  - **6-Year Graded**: Year 1: 0%; Year 2: 20%; Year 3: 40%; Year 4: 60%; Year 5: 80%; Year 6: 100%
                  - **5-Year Graded**: Year 1: 20%; Year 2: 40%; Year 3: 60%; Year 4: 80%; Year 5: 100%
                  - **3-Year Cliff**: Year 1: 0%; Year 2: 0%; Year 3: 100%
                  - **25% per year**: Year 1: 25%; Year 2: 50%; Year 3: 75%; Year 4: 100%
          - Employer Safe Harbor Contributions 
                  - 100% immediate, or
                  - 100% vested in Year 2 when paired with a Qualified Automatic Contribution Arrangement (QACA)

### 401(k) Plan Distributions

Beyond the standard distributable events (termination, retirement, death, and disability), you may permit other types of distributions in your retirement plan:

- **Rollovers** 
    - Participants may rollover their entire account balances from prior-employer retirement plans
    - Participants may rollover their entire account upon severance of employment
    - Participants may make a withdrawal of all or part of their rollover source at any time, if permitted by the plan
- **Loans** 
    - Loans are allowable in qualified 401(k) plans, but are not required should the employer not wish to offer this option
- **Additional Withdrawal Options** 
    - Hardships are permitted, but again, not required
    - In-Service withdrawals may also be permitted, but are not required

 

## Close Your SEP IRA and Start a 401(k) Plan

We've got good news all around! First, if you haven't contributed to the SEP for this calendar/tax year, you could establish a 401(k) now for 2021. Second, if you're working with a financial advisor let them know you'd like to explore options for a 401(k) plan this year. 

Once you've decided that your business has outgrown the limitations of a SEP, contact the financial institution to inform them that you will no longer be contributing to the SEP and you want to terminate the contract/agreement. Also, consider notifying employees that you have discontinued the plan.

Starting a 401(k) is easier than you think, but a lot of time and care should go into the establishment - after all, this is not only your future but the future of your employees.

 

[View full post](https://blog.uniglobal.com/can-we-convert-a-sep-ira-to-a-401k-plan)

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