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 small business’s first company-sponsored retirement plan. But simplicity often means limitations. By switching to a 401(k) plan, employers may be able to better leverage their plan to attract and retain talent while increasing their own contribution limits.
If you aren’t sure if you should switch from a SIMPLE to a 401(k) plan, keep reading!
Five differences to consider when weighing a SIMPLE vs. 401(k)
P.S. - If you’re new to offering a company retirement plan, check out this article first which outlines different plan types.
A common reason small businesses offer a company plan in the first place is
because they want to open their own retirement account, so higher
contribution limits are often an attractive quality for not only employees
but also business owners themselves. With SIMPLE plans, the max contribution
is $13,500 ($16,500 for those 50 or older), while 401(k)s allow for a much
larger contribution limit of $19,500 ($26,000 for those 50 or older).
Employer Contribution Options
One big difference between SIMPLE and 401(k) plans is flexibility around
employer contribution rules. For SIMPLE plans, employer contributions are
mandatory and all contributions are immediately vested. 401(k)s, on the
other hand, do not require employer contributions and the employer has
considerable discretion about how long a worker must be employed before
their employer contributions are vested.
Employee Contribution Types (Pre-Tax Versus Roth)
SIMPLE plans only allow for pre-tax contributions, while 401(k)s allow for
both Roth and pre-tax contributions. Roth contributions allow employees to
pay taxes now on contributions so they don’t have to pay taxes on them when
they are withdrawn during retirement. This can be an attractive option for
some employees depending on their taxable income and specific financial
Option to Include Loans and Hardship Distributions
SIMPLE plans don’t allow for loans (the ability to borrow funds against your
plan) or hardship distributions (the ability to withdraw emergency funds),
while 401(k)s allow for both of these features to be included in the plan
design. So while participants are generally encouraged to not tap into their
account early, the ability to do so can understandably be an important
option for employees.
SIMPLE plans are specifically designed for small 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 do
not have such a limit, so 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 retirement plan today.
Act Soon: The Deadline to Notify Your Employees is November 2nd
If you’re ready to change your SIMPLE plan to a 401(k) plan, be aware of the timelines. You can only amend or change your plan at the beginning of the year (January 1) and you must provide employees 60 days in advance of terminating a SIMPLE IRA. That means, you must inform your employees of any changes by November 2nd. We recommend reaching out to your plan advisor or tax consultant for more information and to help you determine what makes the most sense for you and your business.