SIMPLE 401(k) Plan Basics
In Part 5 of this series we looked at the specifics of the SIMPLE IRA plan. Now let’s examine its “close cousin,” the SIMPLE 401(k).
A SIMPLE 401(k) plan is a combination of a regular 401(k) plan and a SIMPLE IRA. When would a business choose this plan over a SIMPLE IRA or regular 401(k) Plan?
Well . . . not often. The SIMPLE 401(k) doesn’t provide meaningful advantages when compared to these other retirement plans.
SIMPLE 401(k) vs SIMPLE IRA
| Plan Type | Contribution Limits | Setup | Administration | Plan Eligibility | Loans Allowed? |
|---|---|---|---|---|---|
| SIMPLE 401(k) | Same | Plan Document | More | 1,000 hours/year | Yes |
| SIMPLE IRA | Same | Easy—IRS Form | Less | < 1,000 hours/year | No |
👎 A SIMPLE 401(k) plan has more administrative requirements, so an outside consultant will likely be needed.
👍 However, the SIMPLE 401(K) adds some flexibility, allowing for participants to take loans. Also, short-service employees (i.e, employees who work less than 1,000 hours in a year, and make more than $5,000/year) can be excluded from eligibility from the SIMPLE 401(k).
If the above advantage is important to the business, it likely makes sense to go with a regular 401(k) plan, as it will provide more flexibility, higher contributions and similar administrative costs.
SIMPLE 401(k) vs 401(k)
| Plan Type | Contribution Limits | Setup | Administration | Plan Eligibility | Loans Allowed? |
|---|---|---|---|---|---|
| SIMPLE 401(k) | Lower | Plan Document | Similar | 1,000 hours/year | Yes |
| 401(k) | Higher | Plan Document | Similar | 1,000 hours/year | Yes |
👎 Lower contribution limits, and no real advantages.
➜ Practical Tip: The SIMPLE 401(k) plan is an uncommon solution for most businesses, as it provides no real advantages you can’t get from either the SIMPLE IRA or regular 401(k) plan.
Your business is unique, so call a expert to help you determine the best retirement plan for your particular situation.
