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A Guide to SIMPLE 401(k) Plans

A Savings Incentive Match Plan for Employees (SIMPLE plan) can come in the form of a 401(k).

A Savings Incentive Match Plan for Employees, or SIMPLE plan, can come in the form of an IRA or a 401(k). While both SIMPLE plans are a lot alike, the 401(k) plan is a little easier to understand and put into place for employers. So if you’re a small business owner, you may want to consider setting up a SIMPLE 401(k) plan for your company and employees. Below, we go over the pros and cons of SIMPLE 401(k) plans, as well as other important characteristics and alternatives.

If you’re looking for ways to boost your retirement savings, a financial advisor can help you create a retirement plan.

What Is a SIMPLE 401(k) Plan?

A SIMPLE 401(k) plan is a mix between a SIMPLE IRA and a traditional 401(k) plan. It has similar benefits to a regular 401(k) plan, but it works for smaller companies that can’t take on big retirement plans for their employees. To qualify for a SIMPLE 401(k), your company needs to:

  • Have 100 employees or less
  • Have employees with no other retirement plans (including IRAs)
  • File a Form 5500 every year

As a company, you can either make a matching contribution of up to 3% of an employee’s pay or a non-elective contribution of up to 2% of an employee’s pay. The deferral limit for 2024 is $16,000 (which is up from $15,500 in 2023).

Benefits of a SIMPLE 401(k) Plan

Similar alternatives to traditional 401(k) plans are available, but SIMPLE 401(k) plans may be attractive to employers and workers alike. Choosing between one kind of plan and another, though, comes down to tangible benefits. SIMPLE 401(k) plans have some solid advantages, such as:

  • Fully vested. Employees are completely vested in all contributions, including both their own and those from their employer. This is good news for employees who qualify for distributions, as it allows them to take out money whenever they need it.
  • Loans available. Like a regular 401(k) plan, you can take out a loan against your SIMPLE 401(k) plan. This isn’t available with a SIMPLE IRA plan. This can be helpful if you need some cash for an emergency and have the funds available in your SIMPLE 401(k). Along with that, hardship withdrawals are available.
  • No compliance rules. 401(k) plans have non-discrimination rules that apply, while SIMPLE 401(k) plans don’t. This is a benefit to business owners who want to start a retirement plan but may not have the cash flow to pay for administrative costs. Bigger companies face these rules, but usually have the money to afford it.

Drawbacks of a SIMPLE 401(k) Plan

Even though a SIMPLE 401(k) plan may work for many companies, it’s important to consider the downsides.

Even though a SIMPLE 401(k) plan may work for many companies, it’s important to take into consideration the downsides of them as well. Here are some factors to pay attention to before you make your final decision:

  • Lower contribution limits. For 2024, traditional 401(k) plans allow up to $23,000 in contributions. On the other hand, contributions for SIMPLE 401(k) plans are cut off at $16,000. Catch-up contributions for workers 50 and older are also lower: $3,500 for SIMPLE 401(k) plans and $7,500 for traditional 401(k) plans. This could be a hurtful revelation for workers who want to save as much as possible but feel like they’re limited through this plan.
  • Limited availability. The SIMPLE 401(k) plan is a great retirement plan for small businesses, but it’s available exclusively to small businesses. Companies that have more than 100 employees need to look for alternative options, like a traditional 401(k). In turn, these companies may pay more in administrative costs.
  • Immediate employer vesting. Employee contributions are 100% vested, and so are employer contributions. That means workers can receive their distributions — if they qualify — at any time. Traditional 401(k) plans allow vesting after a specific number of years set up by the company, giving it more control.
  • No other plans. Having a SIMPLE 401(k) plan with your employer means you can’t have any other retirement plan set up, even a personal IRA. If you’re looking for multiple ways to save for retirement, this could limit how much money you can put away.

Should You Get a SIMPLE 401(k) Plan?

Retirement plans, including SIMPLE 401(k) plans, can help your employees save for their futures while still working for your company.

Supporting your employees is a great way to keep turnover rates down and retention up. Retirement plans, including SIMPLE 401(k) plans, can help your employees save for their futures while still working for your company.

While SIMPLE 401(k) plans have a lot of benefits, like easy-to-manage rules and the ability to take out a loan, they’re not for every company. Limited availability and low contribution limits might hinder your opportunities.

Alternatives to SIMPLE 401(k) Plans

If you’re unsure of whether or not a SIMPLE 401(k) is the right choice for you or your company, you may want to consider some other retirement plans. Here are some possibilities:

  • SIMPLE IRA. With many of the same benefits as a SIMPLE 401(k), the SIMPLE IRA acts like a regular IRA. However, loans are not allowed with SIMPLE IRAs like they are with their 401(k) counterparts. There’s also no vesting of employer contributions.
  • SEP IRA. The Simplified Employee Pension (SEP) IRA is available for any size business and there isn’t a filing rule for employers. For this option, only the business owner contributes, not the employee. SEP IRAs are tax-deferred, and all contributions are tax deductible.

Tips for Retirement Planning

  • Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • SmartAsset’s retirement calculator can show you what track you are on in terms of savings.

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