Simple 401(k) Plans
What is a SIMPLE 401(k) plan?
A Savings Incentive Match Plan for Employees (SIMPLE) plan makes it possible for companies with as few as two employees to establish a 401(k). SIMPLE 401(k) plans are designed for businesses with 100 or fewer employees who earn $5,000 or more per year.
Under a SIMPLE 401(k), an employee can elect to defer some compensation, but unlike a regular 401(k), the employer must make either:
- A matching contribution, up to 3 percent of each employee’s pay, or
- A nonelective contribution of 2 percent of each eligible employee’s pay
The SIMPLE 401(k) is not subject to annual nondiscrimination testing and does allow for loans. Contributions to a SIMPLE 401(k) are immediately 100 percent vested, which means that an employee who meets the requirements to receive distributions from the plan may withdraw his or her entire account balance at any time. Also, the contribution limits are lower for a SIMPLE 401(k) than for a traditional 401(k).
Employers cannot maintain any other retirement plan for employees who are eligible to participate in the SIMPLE 401(k); however, they may choose to maintain a second retirement plan to cover collectively bargained employees if they are excluded from the SIMPLE 401(k).
What are the benefits of a SIMPLE 401(k)?
Many companies simply outgrow their SIMPLE IRA, so converting to a SIMPLE 401(k) makes sense. Key benefits of a 401(k):
- Higher contribution limits for business owners and employees
- Potential for greater tax deductions, both on a personal and corporate basis
- Greater flexibility in plan design options to meet a plan sponsor’s unique needs
- Ability to add a loan provision
- Ability to incorporate profit-sharing
Use the chart below to determine if now is the right time to convert your plan to a 401(k).
Who may establish a SIMPLE 401(k)?
The SIMPLE 401(k) is only available to businesses with 100 or fewer employees who earn $5,000 or more a year.
Who may participate in a SIMPLE 401(k)?
Both employers and employees may participate in a SIMPLE 401(k) plan.
How do I start a SIMPLE 401(k)?
- Adopt a written plan, called the plan document, which outlines its day-to-day operations.
- Identify a plan provider and/or trust for the plan’s assets and investments.
- Select a recordkeeper or recordkeeping system to track contributions, earnings and losses, and distributions. This person or entity will also help prepare the annual return, which must be filed with the federal government.
- Select a third party administrator to maintain the plan document, fulfill daily tasks and ensure compliance with federal regulations. Your financial advisor may choose a third-party administrator and/or recordkeeper on your behalf.
- Provide eligible employees, or plan participants, with a summary plan document (SPD), which is the document that outlines who can participate and how the plan works.
The written plan also provides a central document, or collection of documents, which explains the rights of the employees and employee eligibility for participating in the plan and enables government agencies to determine whether it satisfies applicable laws.
If the plan allocates responsibilities for performing administrative functions to other parties, such allocation must identify who is responsible for ensuring compliance with the requirements of the tax code, including compliance requirements for loans and distributions.
In the case of a funding through multiple financial institutions, the employer may adopt a single written plan to coordinate administration among the financial institutions, rather than having a separate document for each issuer.