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Choosing a Retirement Plan: Retirement Plan Options

Starting a retirement savings plan can be easier than most people think.  What's more, there are a number of retirement programs that provide tax advantages to both employers and employees.


Payroll Deduction IRA
Even if an employer does not want to adopt a retirement plan, it can allow its employees to contribute to an IRA through payroll deductions, providing a simple and direct way for eligible employees to save.

Salary Reduction Simplified Employee Pension (SARSEP)
A SARSEP is a SEP set up before 1997 that includes a salary reduction arrangement. Because this is a simplified plan, the administrative costs should be lower than for other more complex plans. Instead of establishing a separate retirement plan, in a SARSEP, employers make contributions to their own IRA and the IRAs of their employees, subject to certain percentages of pay and dollar limits.

Simplified Employee Pension (SEP)
Simplified Employee Pensions (SEPs) provide a simplified method for employers to make contributions to a retirement plan for their employees.  Instead of establishing a profit-sharing or money purchase plan with a trust, employers can adopt a SEP agreement and make contributions directly to an individual retirement account or an individual retirement annuity established for each eligible employee.

SIMPLE IRA Plan
Tax-favored retirement plans that certain small employers (including self-employed individuals) can set up for the benefit of their employees, a SIMPLE IRA plan is a written salary reduction agreement between employee and employer that allows the employee, if eligible, to choose to have the employer contribute the salary reductions to a SIMPLE IRA on the employee's behalf.

401(k) Plan
A type of defined contribution plan that allows employee salary deferrals and/or employer contributions.

SIMPLE 401(k) Plan
A type of defined contribution plan available to the small business owner with 100 or fewer employees.  Under a SIMPLE 401(k) Plan, an employee can elect to defer some compensation.  Unlike a standard 401(k) plan, the employer must make either: (1) a matching contribution up to 3% of each employee's pay, or (2) a non-elective contribution of 2% of each eligible employee's pay.

403(b) Tax-Sheltered Annuity Plan
Annuity plans for certain public schools, colleges, universities, churches, public hospitals, and charitable entities deemed tax-exempt under IRC section 501(c)(3).

Profit-Sharing Plan
A type of defined contribution plan which allows discretionary annual employer contributions.

Money Purchase Plan
A type of defined contribution plan in which employer contributions are fixed.

Defined Benefit Plan
A type of plan that is funded primarily by the employer and whose contribution is actuarially determined.

Page Last Reviewed or Updated: 05-Mar-2014