In Introduction To SIMPLE 401(k) Plans, we give an overview of the SIMPLE 401(k) plan and compare it to the traditional 401(k) plan. Here we compare and contrast the SIMPLE 401(k) with the SIMPLE IRA. These plans share many similarities, but they also have differences that could provide enough reason for an employer to choose one type of SIMPLE plan over the other.

Tutorial: Retirement Planning

Eligible Employers
For both the SIMPLE IRA and the SIMPLE 401(k) plans, eligible employers must have no more than 100 employees who have received at least $5,000 in compensation from the employer for the previous year. Employers cannot maintain any other retirement plan for employees who are eligible to participate in the SIMPLE 401(k). However, the employer can choose to maintain a second retirement plan to cover those employees who are not eligible to participate in the SIMPLE 401(k) plan.

By contrast, an employer who chooses a SIMPLE IRA is not allowed to maintain any other plan whatsoever while maintaining a SIMPLE IRA. (Note that exceptions are allowed for employees covered under a collective bargaining agreement, and plans that cover these employees are disregarded for this purpose.) Consequently, an employer may choose one plan over the other, depending on the need to provide a retirement plan for certain employees.

Note: Certain exceptions apply to the "only plan" requirement, if the other plan is maintained during a calendar year in which an acquisition, disposition or similar transaction occurs or in the calendar year following such a transaction. Check with your plan administrator if you feel you may be eligible for this exception.

Eligible Employees
To be eligible to participate in the SIMPLE 401(k) plan, employees may be required to perform service for at least one year and reach the age of 21. There is no age requirement for the SIMPLE IRA. Instead, any employee who earned at least $5,000 during any two preceding years and is reasonably expected to earn $5,000 in the current year must be allowed to participate in the plan. For both plans, the employer may choose to implement less stringent eligibility requirements.

Operations
No non-discrimination testing is required for either plan, and both plans are subject to the 60-day notification requirement (as explained in the Introduction To SIMPLE 401(k) Plans). The deadline to establish either plan is from January 1 to October of the year. This deadline allows employees to make salary-deferral contributions before year-end.

Loans
Because the SIMPLE IRA is an IRA-based plan, loans are not allowed. On the other hand, an employer may include loans as a feature in a SIMPLE 401(k) plan. For employees who need to tap into their retirement assets when they are ineligible to receive distributions from the plan, loans can be an attractive plan feature.

Vesting
For both the SIMPLE IRA and the SIMPLE 401(k) plans, all contributions are immediately 100% vested.

Contributions
Both plans permit the same type of contributions. Employees may make salary-deferral contributions, while employers may choose to make matching contributions to employees who make salary-deferral or non-elective contributions.

For the matching contributions, employers must contribute dollar for dollar up to 3% of the employee's compensation. For the non-elective contributions, employers must contribute 2% of the employee's compensation.

Year SIMPLE Deferral Limit
2002 $7,000
2003 $8,000
2004 $9,000
2005 $10,000
2006 $10,000
2007 $10,500
2008 $10,500
2009 $11,500
2011 $11,500
2012 $11,500
2013 $12,000

Participants who are at least age 50 by the end of the year may make catch-up contributions.

However, employer contributions for the SIMPLE IRA and the SIMPLE 401(k) are subject to different rules. As a result, the two plans will require/allow different employer contribution amounts. For instance, all employer contributions to a SIMPLE 401(k) are subject to the compensation cap (which is $255,000 for 2013), while only non-elective employer contributions to SIMPLE IRAs are subject to the compensation cap. The following is an example of how this could affect contributions that employees receive.

Example
ABC Company established a SIMPLE for its employees and has elected to make a matching contribution to the plan for the 2013 calendar year. Jane, an employee, is eligible to participate in the plan and receives compensation of $350,000 for the year from the company. Jane has decided to defer the maximum allowable amount of $12,000 to the plan. The amount Jane receives as an employer contribution is determined by the type of SIMPLE that ABC adopted.
If ABC Company adopts a SIMPLE IRA, Jane may receive a matching contribution of $10,500 (3% of $350,000).
If ABC Company adopts a SIMPLE 401(k), Jane would receive no more than $7,650 as a matching employer contribution. This is because ABC Company may consider no more than $255,000 of Jane\'s compensation for plan purposes (3% of $255,000).
As we stated earlier, the non-elective contribution is subject to the same compensation cap for both plans. Therefore, if ABC Company had elected to make non-elective contributions, Jane\'s contribution amount would be the same under both plans.

Reducing Matching Contributions
For the SIMPLE IRA, an employer who elects to make matching contributions may choose to reduce the amount to one that is less than 3% but no less than 1% for two out of every five years. This option is not available for SIMPLE 401(k)s.

Conclusion
Choosing a retirement plan is one of the most important financial decisions a business owner will make for his or her business. The retirement plan not only allows the employer to claim a tax deduction for contributions, but also serves as a means of attracting valuable employees. However, some plans are an administrative burden and can be quite costly to maintain. A small business owner who wants to avoid complex administration and limit costs may find the SIMPLE plans attractive. Before choosing a SIMPLE plan, the business owner may want to review certain specifics, including the average age of the business' employees and whether they would prefer loans be allowed under the plan.

Related Articles
  1. Retirement

    How Much Should You Have In Your 401(k) To Retire?

    Determining how much money should be in your 401(k) when you retire depends on several variables, many of which are uncertain.
  2. Investing

    How To Make Sure Your Healthcare Costs Do Not Ruin Your Retirement

    The best proactive plan of action for a stable retirement is to understand medical costs, plan ahead, invest properly, and consider supplemental insurance.
  3. Investing

    3 Small Steps to Maximize Your Investing Goals

    Instead of starting the New Year with ambitious resolutions, why not taking smaller manageable steps that can have a real impact.
  4. Investing

    7 Creative Ways to Save for an Early Retirement

    Take note of these out of the box steps you can take towards securing yourself an earlier, more comfortable retirement.
  5. Your Clients

    Tips for Making Your Nest Egg Last Longer

    If you’re trying to figure out how to make your hard-earned nest egg last, there’s one piece of advice that stands above the rest.
  6. Personal Wealth & Private Banking

    What People Hate About Financial Advisors

    Advisors need to make a living too, but doing so by cutting corners at a client's expense isn't right. Here are the top complaints against advisors.
  7. Products and Investments

    SRI Funds and Your 401(k): What You Need to Know

    Socially responsible, green and impact investing options are now DoL-approved for 401(k) plans. Here's what investors should know.
  8. Retirement

    Retirement Plan Tax Prep Checklist

    Here's a list of items you need to have in order by tax time, including paying attention to those pesky required minimum distributions.
  9. Retirement

    When to Fire Your Advisor and Go Robo-Advisor

    Human financial advisor or robo-advisor: Which suits your needs best? Here are some general tips to help guide you to the right professional.
  10. Retirement

    How You Actually Get Your Pension After Retirement

    No matter what type of pension plan you have at work, decisions have to be made when you retire. Here are your options.
RELATED FAQS
  1. How old do I have to be to make catch-up contributions?

    Most retirement plans such as 401(k), 403(b), individual retirement accounts (IRAs) and Roth IRAs allow for catch-up contributions ... Read Full Answer >>
  2. Am I losing the right to collect spousal Social Security benefits before I collect ...

    The short answer is yes, if you haven't reached age 62 by December 31, 2015. The Bipartisan Budget Act of 2015 disrupted ... Read Full Answer >>
  3. Where else can I save for retirement after I max out my Roth IRA?

    With uncertainty about the sustainability of Social Security benefits for future retirees, a lot of responsibility for saving ... Read Full Answer >>
  4. Will quitting your job hurt your 401(k)?

    Quitting a job doesn't have to impact a 401(k) balance negatively. In fact, it may actually help in the long run. When leaving ... Read Full Answer >>
  5. Can a 401(k) be taken in bankruptcy?

    The two most common types of bankruptcy available to consumers are Chapter 7 and Chapter 13. Whether you file a Chapter 7 ... Read Full Answer >>
  6. When can catch-up contributions start?

    Most qualified retirement plans such as 401(k), 403(b) and SIMPLE 401(k) plans, as well as individual retirement accounts ... Read Full Answer >>
Trading Center