There tends to be a lot said about SIMPLE IRAs, profit-sharing plans and the SBO-401(k). But not much attention is given to the SIMPLE 401(k) plan. When it is mentioned, the question usually is why would one choose a SIMPLE 401(k) instead of a SIMPLE IRA or regular 401(k) plan? The fact is the SIMPLE 401(k) plan is a cross between a SIMPLE IRA and traditional 401(k) plan and offers some features of both plans . Here we review some of the features and benefits of the SIMPLE 401(k) plan and compare it to the traditional 401(k) plan.
- No Testing - An employer that adopts a traditional 401(k) plan may be required to perform certain non-discrimination and top-heavy testing to ensure that the plan operates in compliance with regulatory requirements. Generally, such testing must be done by professionals who specialize in that area and can be quite costly. SIMPLE 401(k) plans, on the other hand, do not require these tests. This can be very appealing to a small business owner who likes the features of the 401(k), but can't afford the administration costs of testing.
- Loans Allowed -Loans can be an attractive feature of a qualified plan because employees and business owners usually like the idea of being able to borrow their own funds and make loan and interest payments to their own accounts. The loan feature can be made available in both SIMPLE and traditional 401(k) plans.
- Immediate Vesting of Contributions - With a traditional 401(k), employer contributions can be subject to a vesting schedule, and this may help to reduce high employee turnover. But contributions to a SIMPLE 401(k) are immediately 100% vested, which means that an employee who meets the requirements to receive distributions from the plan may withdraw his/her entire account balance at any time.
- Contribution Limits are Lower - Contribution limits for a SIMPLE 401(k) plan are lower than the limits for the traditional 401(k) plan. The salary deferral limits of both plans for 2013 are $12,000 and $17,500 respectively.
SEP, profit-sharing or other defined-contribution plan, maintain both plans concurrently and allow eligible employees to participate in both plans.
SIMPLE 401(k) Eligibility Requirements
- Employer- The SIMPLE 401(k) is available to those same employers who are eligible to adopt a traditional 401(k) plan: this includes sole proprietors, partnerships and corporations. However, while there is no restriction on the number of employees for the traditional 401(k) plan, only employers who adhere to the 100-employee limit can adopt a SIMPLE 401(k) plan. Under the 100-employee limitation rule, a SIMPLE may be established by an employer that had no more than 100 employees who received at least $5,000 in compensation for the preceding year.
- Employee -Employees who are at least 21 years old and have completed at least one year of service must be allowed to participate in the SIMPLE 401(k) plan.
Annual Notice Requirements
The employer must provide a deferral notice to each eligible employee for the year the plan is established and for each year the employer continues to maintain the plan. Generally, the notification must be provided at least 60 days before the employee would be eligible to participate in the plan. This notification must include a statement of the employee's right to make salary-deferral contributions to the plan and to terminate his or her participation in the plan.
An employer is required to provide employees with an explanation of the plan's features and benefits prior to the effective date of the traditional 401(k) plan.
Deadline to Establish SIMPLE 401(k)
A SIMPLE 401(k) must be established between January 1 and October 1. An exception applies to businesses that come into existence after Oct. 1. For these businesses, the plan can be established as soon as administratively feasible.
The Bottom Line
We've reviewed just some of the highlights of the SIMPLE 401(k) plan. As you can see, the SIMPLE 401(k) boasts some attractive features, but it also has some disadvantages when compared with other plans. If you think the SIMPLE 401(k) might be suitable for your business, be sure to consider the pros and cons. More detailed information can be obtained from your 401(k) plan provider and your tax professional. For more information, see SIMPLE IRA Vs SIMPLE 401(k)s.