In a time of fierce competition for qualified employees, offering a retirement plan can give your small business an edge in attracting and retaining workers. A whopping 79% of employees consider an employer-sponsored 401(k) or similar retirement plan a "must have," according to MetLife's latest Employee Benefits Trend Study.
SIMPLE 401(k) and SIMPLE IRA plans are tax-deferred retirement accounts for employers who have fewer than 100 employees. While the plans are very similar to traditional 401(k)s and individual retirement accounts (IRAs), there are some important differences to understand when deciding whether these plans are right for your business.
What Is a SIMPLE IRA?
Savings Incentive Match Plan for Employees (SIMPLE) IRAs give small employers an easy way to help employees save for retirement. To offer a SIMPLE IRA, your company must typically have 100 or fewer employees and cannot offer any other employer-sponsored retirement plan.
Any employee earning at least $5,000 annually can choose to participate in a SIMPLE IRA by having pretax money taken out of their wages. As with traditional IRAs, money in a SIMPLE IRA grows tax-deferred until withdrawal. Employees own, or are vested in, the money in their SIMPLE IRA funds immediately, Withdrawals are subject to income tax; any withdrawals before age 59½ incur an additional 10% tax, while withdrawals within the first two years of plan participation incur an additional 25% tax.
Employers are required to contribute to their employees' SIMPLE IRAs in one of two ways.
- Matching contributions: Employers match employee contributions dollar-for-dollar up to 3% of annual compensation. This percentage can be reduced to less than 3%, but no less than 1%, in two out of every five years. If employees don't participate, they don't get any employer contributions.
- Nonelective contributions: Employers contribute 2% of annual compensation for every employee who earns at least $5,000 per year—even if the employee doesn't contribute to the plan. The maximum an employer can contribute per employee is $330,000 in 2023 ($305,000 in 2022).
Whether you choose matching or nonelective contributions, the same option must apply companywide. That means you and all your employees receive the same type and percentage of contributions.
Rules for SIMPLE IRAs may vary, so you should consult the IRS and your company's plan provider for specifics. Typically, however, the following contribution limits apply:
- Employees can contribute up to $15,500 in 2023 ($14,000 in 2022).
- Employees ages 50 and up can make an additional catch-up contribution of $3,500 annually in 2023 ($3,000 in 2022).
- For employees who participate in any other employer-sponsored retirement plan, the maximum total salary reduction contribution they can make to all their plans is $22,500 in 2023 ($20,500 in 2022).
What Is a SIMPLE 401(k)?
A Savings Incentive Match Plan for Employees (SIMPLE) 401(k) allows companies with 100 or fewer employees to offer an employer-sponsored 401(k) plan. Employees with wages of at least $5,000 in the prior calendar year can opt to participate in a SIMPLE 401(k) by having contributions taken from their paychecks. Money is 100% vested immediately and isn't taxed until it's withdrawn.
Participants can make withdrawals from their accounts beginning at age 59½; earlier withdrawals may incur a 10% penalty in addition to income taxes. Employees can also take loans against the balance in their SIMPLE 401(k). They must pay back the loan in compliance with the plan's terms, however, or possibly face taxes and penalties.
A major difference from a standard 401(k) is that employers must match employee contributions to a SIMPLE 401(k). As with a SIMPLE IRA, employers can either:
- Match employee contributions dollar-for-dollar up to 3% of wages, or
- Make a nonelective contribution of 2% of eligible employees' wages
Employee contributions to a SIMPLE 401(k) are limited to $15,500 in 2023 ($14,000 in 2022). Employees aged 50 and up can make an additional catch-up contribution of $3,500 in 2023 ($3,000 in 2022).
SIMPLE 401(k)s are only an option for companies that don't offer any other qualified retirement plans. Employers who offer them must file IRS Form 5500 annually.
SIMPLE IRA vs. SIMPLE 401(k) Plans
While there are plenty of similarities between SIMPLE IRAs and SIMPLE 401(k)s, there are also some important differences to consider when choosing whether to offer these plans. Here's a closer look.
How SIMPLE IRAs and SIMPLE 401(k)s Are Alike
- Employers must have 100 or fewer employees to offer the plans.
- Employers cannot provide any other type of retirement plan.
- Employees are 100% vested in the plan immediately.
- Employers must contribute to employees' retirement accounts by making either a 3% match or a 2% nonelective contribution.
How SIMPLE IRAs and SIMPLE 401(k)s Are Different
- Employees can take out loans against SIMPLE 401(k) accounts, but not against SIMPLE IRAs.
- SIMPLE 401(k) plans require employers to file IRS Form 5500 each year; SIMPLE IRA plans do not.
- Employers who make 3% matching contributions to employee SIMPLE IRAs can choose to adjust the percentage to less than 3% but no less than 1% for two in every five years. SIMPLE 401(k) plans don't provide this flexibility.
Helping Employees Save for Retirement
You can use SIMPLE IRAs and SIMPLE 401(k)s to help your employees save for retirement without the administrative complexity that many employer-sponsored retirement plans involve. Showing that you care about employees' financial health can make it easier to attract and retain qualified people. Not sure if a SIMPLE IRA or SIMPLE 401(k) makes sense for your business? Compare other retirement plan options that can help you and your employees prepare for a comfortable future.