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
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.
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.
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.
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.
For both the SIMPLE IRA and the SIMPLE 401(k) plans, all contributions are immediately 100% vested.
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|
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.
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.
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.
RetirementWorried about retirement? Here are several strategies to greatly reduce the chance your nest egg will end up depleted.
ProfessionalsAn in-depth look at how manage to 401(k) assets during times of market volatility.
ProfessionalsRetirement is creeping closer for clients in their 30s and 40s. It's a great segment for financial advisors to tap to build long-term client relationships.
ProfessionalsA look at Donald Trump's statement of finances and the biggest lesson every investor can learn.
ProfessionalsThe market has corrected...now what? Here's what you should consider rather than panicking.
RetirementIt's shocking, but most American workers (73%) have no 401(k) retirement funds. Start saving now to anchor your retirement.
ProfessionalsThink a robo-advisor might be the right choice for you? Be sure to ask these questions first.
ProfessionalsInstead of going through the usual retirement planning steps, some people are focusing on fostering a lower cost lifestyle from the start.
Forex EducationThe professional forex trader lives an affluent lifestyle but pays the price with many hours of research and market watching.
InsuranceWhat you need to know before buying a "reverse life" policy.
A Qualified Longevity Annuity Contract (QLAC) is a deferred annuity ...
A trust that is treated as the beneficiary of an individual retirement ...
A method that taxpayers can use to place retirement savings in ...
The amount of pension benefit accrued by an employee who had ...
A tax-efficient retirement savings account available in Great ...
Elder care, sometimes called elderly care, refers to services ...
It is possible to trade penny stocks through an individual retirement accounts, or IRA. However, penny stocks are generally ... Read Full Answer >>
If you are older than 59.5 and have been contributing to your IRA for more than five years, you may withdraw funds to pay ... Read Full Answer >>
You can use your IRA to pay for college tuition even before you reach retirement age. In fact, your retirement savings can ... Read Full Answer >>
Contributions to IRA, Roth IRA, 401(k) and other retirement savings plans are limited by the IRS to prevent the very wealthy ... Read Full Answer >>
With a few exceptions, early withdrawals from traditional or Roth IRAs generally incur a tax penalty equal to 10% of the ... Read Full Answer >>
The best way to use your 401(k) retirement savings account is to take normal distributions after you reach retirement age. ... Read Full Answer >>