SIMPLE IRA vs 401(k) Plan: 5 Differences to Consider When Switching Plan Types
SIMPLE IRA vs 401(k) Plan: 5 Differences to Consider When Switching Plan Types
Last Updated: December 12, 2024
Savings Incentive Match Plan for Employee (SIMPLE) IRA plans are, well, simple. They have lower fees and are easier to administer, making them an attractive choice for a business’s first company-sponsored retirement plan. But with simplicity often comes limitations. By switching to a 401(k) plan, employers may have more flexibility to leverage their plan to attract and retain talent while increasing their own contributions.
If you’re considering switching from a SIMPLE IRA to a 401(k) plan, keep reading!
Five Differences to Consider When Weighing a SIMPLE IRA Plan vs. a 401(k) Plan
If you’re new to offering a company retirement plan, check out this article first, which outlines different plan types.
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Contribution Limits
Because business owners are usually also savers in the plan, higher contribution limits are an attractive quality for not only employees but also employers.
With SIMPLE IRA plans, the maximum contribution in 2025 is $16,5000 ($20,000 for those 50 or older), while 401(k) plans allow for contributions up to $23,500 ($31,000 for those 50 or older and $34,750 for those age 60-63). This means that savers could put away between $7,000 to $14,750 more each year with a 401(k) plan than with a SIMPLE IRA plan. -
Employer Contributions
One big difference between SIMPLE IRA plans and 401(k) plans is flexibility around employer contributions. For SIMPLE IRA plans, employer contributions are mandatory. Employers must make either matching employee deferrals up to 3% of the employee's compensation or nonelective contributions of 2% of the employee's compensation, regardless of whether they contribute on their own. This means that costs will increase as the company grows. Conversely, with 401(k) plans, employers have the option to make contributions but are not required to.
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Vesting
With SIMPLE IRA plans, all contributions are immediately vested. That means employees have full ownership over the employer contributions to their account, and if they leave their job, that money is theirs to keep. Without a vesting schedule, employees may not be as incentivized to stay with the company, which can lead to higher turnover.
401(k)s, on the other hand, allow for considerable discretion about how long a worker must be in their service before their employer contributions are vested. -
Option to Include Loans and Hardship Distributions
SIMPLE IRA plans don’t allow for loans (the ability to borrow funds against your plan) or hardship distributions (the ability to withdraw emergency funds). 401(k) plans, on the other hand, allow for both of these features to be included in the plan design. So, while savers are generally encouraged to not tap into their account early, the ability to do so can be an important option for employees. -
Company Size
SIMPLE IRA plans are specifically designed for smaller businesses, which is why these plans are only available to businesses with less than 100 employees who earn at least $5,000 in compensation during the year.
401(k) plans have no such limit. If your company is approaching 100 employees, or will be soon, it may be time to consider other plan options.
Set up your affordable, flexible 401(k) plan with Vestwell.
Act Soon: Timelines for Notifying Your Employees
The SECURE Act 2.0 has allowed for mid-year changes from a SIMPLE IRA plan to a safe harbor 401(k) plan, starting in 2024. Employers now have the flexibility to switch plans mid-year, expanding the timeframe for notifying employees beyond previous requirements. While specific notification timelines may vary based on the timing of the transition, its crucial to inform your employees well in advance of terminating a SIMPLE IRA and transitioning to a new plan type.
Remember, the best retirement plan for your company depends on your business's unique needs, size, and situation. Fortunately, Vestwell can help design a plan that’s right for you. Vestwell’s modern, digital retirement plan platform takes the hassle out of setting up and administering an employer-sponsored retirement plan. If you have questions about your SIMPLE IRA and want to chat with a specialist, click here.
