A subset of the 401(k) plan is the SIMPLE 401(k) plan. Just like the SIMPLE IRA plan, this is a plan just for you: the small business owner with 100 or fewer employees. However, just as with the SIMPLE IRA plan, there is a two-year grace period if you exceed 100 employees, to allow for growing businesses. Under a SIMPLE 401(k) plan, an employee can elect to defer some compensation. But unlike a regular 401(k) plan, you the employer must make either: A matching contribution up to 3% of each employee’s pay, or A non-elective contribution of 2% of each eligible employee’s pay. No other contributions can be made. The employees are totally vested in any and all contributions. If you establish a SIMPLE 401(k) plan, you: Must have 100 or fewer employees. Cannot have any other retirement plans. Need to annually file a Form 5500. The IRS has issued Model Amendments for SIMPLE 401(k) plans. These Model Amendments permit a 401(k) plan to become a SIMPLE 401(k) plan (if the other requirements are met). Pros and cons Plan is not subject to the non-discrimination rules that apply to everyday 401(k) plans. Employees are fully vested in all contributions. Straightforward benefit formula allows for easy administration. Optional participant loans and hardship withdrawals add flexibility for employees. No other retirement plans can be maintained. Withdrawal and loan flexibility adds administrative burden for the employer. Who contributes Employee salary deferrals and Employer contributions. Contribution limits Employee - $15,500 in 2023, $14,000 in 2022 and $13,500 in 2020 and 2021. If the employee is age 50 and over, an additional “catch-up” contribution is allowed. The additional contribution amount is $3,500 in 2023 ($3,000 in 2022, 2021, and 2020). Employer - A dollar-for-dollar match up to 3% of pay or a 2% non-elective contribution for each eligible employee. Filing requirements Annual filing of Form 5500 is required. Participant loans Loans are permitted. In-service withdrawals Yes, but subject to possible 10% penalty if under age 59-1/2. Additional resources Consider a SEP or SIMPLE IRA plan.
