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.
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
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.