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SIMPLE 401(k) Plan Definition

What Is a SIMPLE 401(ok) Plan?

Table of Contents

A SIMPLE 401(ok) is a retirement financial savings account supplied by small enterprise employers with 100 or fewer workers. The SIMPLE 401(ok) works identical to a daily 401(k) plan, combining it with the simplicity of a SIMPLE IRA with just a few minor modifications. Staff can defer a few of their wages to the plan and employers should both make an identical or non-elective contribution of a certain quantity of every worker’s wages. Employers who’re eligible to arrange these plans should meet sure eligibility necessities and the Internal Revenue Service (IRS) units limits on how a lot could be contributed every year.

Key Takeaways

  • SIMPLE 401(ok) plans are retirement financial savings plans supplied by small enterprise employers or corporations with 100 or fewer workers.
  • This type of plan combines the options of conventional 401(ok)s with the simplicity of SIMPLE IRAs.
  • Individuals have to be no less than 21 and have one 12 months of service earlier than they’ll take part.
  • Contributions to the plan are totally vested instantly and workers are allowed to borrow in opposition to their account balances.
  • Employes who present SIMPLE 401(ok)s cannot supply their workers another choices and contribution limits are decrease than conventional 401(ok) plans.

How SIMPLE 401(ok) Plans Works

Because the identify implies, the SIMPLE 401(ok) is a simplified, stripped-down model of a daily 401(ok) plan that’s geared towards self-employed people and small enterprise house owners. And identical to SIMPLE IRA accounts, solely employers with a employees of 100 or fewer can set up SIMPLE 401(ok) plans. Establishing companies could be structured in any type, together with sole proprietors, firms, and partnerships.

SIMPLE 401(ok)s work identical to common 401(ok)s. Staff contribute with pre-tax {dollars} out of their paychecks, investing the funds in choices offered by the plan administrator. The IRS limits annual contribution quantities, that are about two-thirds of these allowed for normal 401(ok)s. Staff can contribute a most of $13,500 in 2021 and $14,000 in 2022. Individuals 50 and over are allowed to deposit a further catch-up contribution of $3,000.

All employer contributions to a SIMPLE 401(ok) are topic to an worker compensation cap, which is $290,000 for 2021 ($305,000 for 2022). That is a method the SIMPLE 401(k) differs from a SIMPLE IRA. Not like conventional 401(ok)s, employers are required to make both an identical contribution to their workers’ accounts—as much as 3% of every worker’s pay or a nonelective contribution of two% of every eligible worker’s pay.

Corporations that provide their workers a SIMPLE 401(ok) plan should file Type 5500 yearly.

SIMPLE 401(ok) Guidelines and Rules

Staff who’re no less than 21 years previous and full no less than one 12 months of service have to be allowed to take part of their employers’ SIMPLE 401(ok) plans. They have to additionally obtain no less than $5,000 in SIMPLE compensation from their employers for the previous 12 months with the intention to participate.

A SIMPLE 401(ok) have to be established between January 1 and October 1. Funds have to be held within the account till the worker reaches age 59½. Withdrawals made earlier than that time are topic to pay an early withdrawal penalty of 10%.

The employer should present a deferral discover to every eligible worker for the 12 months the plan is established and for every year the employer continues to take care of the plan. This notification have to be offered no less than 60 days earlier than the worker turns into eligible to take part. It should embrace a press release of the worker’s proper to make salary deferral contributions and to terminate their participation within the plan.

The SIMPLE in a SIMPLE 401(ok) plan is brief for Financial savings Incentive Match Plan for Staff of Small Employers.

Benefits and Disadvantages of SIMPLE 401(ok)s

There are a variety of various advantages to taking part in a SIMPLE 401(ok) plan. However there are additionally a number of drawbacks. We have famous a few of the main ones beneath.


Contributions to a SIMPLE 401(ok) are instantly 100% vested. An worker who meets the necessities to obtain distributions from the plan might withdraw their complete account stability at any time when they like and will not lose it in the event that they change jobs after the cash is of their account.

One of many simplified options is that SIMPLE 401(ok) plans don’t require nondiscrimination and top-heavy testing to make sure that the plan operates in compliance with IRS guidelines. Such testing should usually be accomplished by professionals and could be fairly expensive.

Though withdrawals earlier than the age of 59½ are topic to a penalty, workers can take out loans in opposition to their SIMPLE 401(ok) balances. Additionally they have the choice of creating hardship withdrawals from their plans in the event that they want to take action.


Not like different retirement choices, employer contributions are obligatory for many who supply SIMPLE 401(ok) plans to their workers. As famous above, employers have one in every of two choices accessible. They’ll contribute both 3% of every worker’s pay or they’ll make nonelective contributions of two% of every eligible employee’s salary.

IRS guidelines prohibit an organization from providing different sorts of retirement plans to workers already coated by a SIMPLE 401(ok). That mentioned, these corporations might select to take care of a separate retirement plan for different workers not coated by the SIMPLE 401(ok).

Contribution caps to SIMPLE 401(ok)s are smaller than these for conventional 401(ok) plans. As famous earlier, workers can solely contribute $13,500 in 2021 and $14,000 in 2022 to a SIMPLE 401(ok) plan with catch-up contributions of $3,000 per 12 months for these 50 and older. That is contrasted with the boundaries set for conventional plans, the place taxpayers can put aside $19,500 to their 401(ok)s in 2021 and $20,500 in 2022. Catch-up contributions for these plans are $6,500 per 12 months.


  • Fast 100% vesting for workers

  • No discrimination testing for employer

  • Loans and hardship withdrawals allowed

The Backside Line

Serving to your workers save for retirement is an effective way to maintain turnover charges down and retention up. It would not harm in attracting expertise, both—protecting a small agency aggressive with the perks supplied by bigger firms.

However whereas SIMPLE 401(ok) plans have a number of advantages, resembling easy-to-manage guidelines, they do have some disadvantages when put next with different financial savings plans. The obligatory contributions and the paperwork, simplified although it’s, generally is a burden.

In consequence, they are not for each firm however then, few choices are. Seek the advice of with 401(ok) plan suppliers and your staff of tax professionals to see if this retirement car is the best suited for you and your staff.

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