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 employers.
- 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 - $13,500 in 2020, $13,000 in 2019, and $12,500 in 2018. If the employee is age 50 and over, an additional “catch-up” contribution is allowed. The additional contribution amount is $3,000 in 2020, 2019 and 2018.
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.