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.
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 2022 is $14,000.
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 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 2022, traditional 401(k) plans allow up to $20,500 in contributions. On the other hand, contributions for SIMPLE 401(k) plans are cut off at $14,000. Catch-up contributions for workers 50 and older are also lower: $3,000 for SIMPLE 401(k) plans and $6,000 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?
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
- SmartAsset’s retirement calculator can help you figure out exactly how much you’ll need to save for the retirement you want. To best use this tool, make sure you have on hand some important information. This includes your annual income, your monthly savings, how much you expect to spend annually in retirement, details about your Social Security benefits and more.
- There are many outside services available for retirement planning, with perhaps the most popular being financial advisors. The financial advisor matching tool from SmartAsset can set you up with as many as three advisors in your area. Your responses to our short questionnaire will dictate which advisory matches you receive, so be sure to answer as accurately as possible.
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