What are SIMPLE IRAs and SIMPLE 401(k)s?
A savings incentive match plan for employees, or SIMPLE, is a retirement plan designed for small businesses. Companies with 100 or fewer employees whose employees make at least $5,000 are eligible to offer them. These plans allow employees to contribute and require that employers do. They can’t be offered in conjunction with another type of retirement plan, such as a defined contribution, defined benefit, or 403(b) plan.
SIMPLEs can be affordable retirement benefits for small businesses that want to help their employees save for retirement. They come with other advantages, including:
- Ease of setup and administration
- Avoidance of nondiscrimination testing
Pros and cons of SIMPLE IRAs vs. SIMPLE 401(k)s
SIMPLE IRAs and SIMPLE 401(k)s follow many of the same rules. Both are for small businesses, have the same contribution limits, and require that the employer make a company matching contribution or a nonelective contribution on behalf of eligible employees. Also, employer contributions must be 100% vested. There are, however, some key differences between the two plans.
|SIMPLE IRA||SIMPLE 401(k)|
|Maximum eligibility requirements||
|In-service withdrawals||Allowed, subject to a 10% penalty tax if withdrawn before age 59½, unless an exception applies; 10% increased to 25% if withdrawn within two years of participation in the SIMPLE IRA||Allowed, subject to a 10% penalty tax if withdrawn before age 59½, unless an exception applies|
|Portability when leaving employer||
|Elective match compensation limit||Not restricted to annual compensation limit||Subject to annual compensation limit|
|Form 5500||Not required||Required|
|Plan termination||Not permitted midyear; requires 60-day notice prior to January 1||Permitted at any time|
These differences may be small individually, but when added together, you can see why a plan sponsor may have chosen one SIMPLE over the other. These characteristics can also help you educate plan sponsors as they look to expand into other plan types, such as traditional 401(k)s.
The opportunity: plans simply outgrowing themselves
There’s an opportunity for you to help plan sponsors move from a SIMPLE—IRA or 401(k)—to a more robust, tailored retirement plan, such as a traditional 401(k). There are over 900,000 SIMPLEs—IRAs and 401(k)s combined—in the United States, helping four million participants save for retirement. Total assets in these plans are over $120 billion.1
Although we don’t know how many plan sponsors are looking for help changing plan type, we do know which types of businesses may be looking for a change. Some businesses will be required to change plan types due to employee growth—SIMPLEs are capped at 100 employees.2 Others will want to make their plan more competitive in attracting and retaining talented employees. Look for small businesses that are growing to help identify new prospects.
Benefits of a traditional 401(k) over a SIMPLE IRA and SIMPLE 401(k)
Why might you want to help plan sponsors move from a SIMPLE—IRA and 401(k)—to a traditional 401(k) plan? There are several beneficial reasons to do so.
Help participants save more. SIMPLEs have much lower annual participant contribution limits, including catch-up contributions for people age 50 and older. The maximum employer contribution depends on the type of SIMPLE and whether a company matching contribution or nonelective contribution is chosen. Under a 401(k) plan, the maximum employer contribution (which includes elective deferrals) is $61,000 ($67,500 for participants age 50 and older).
|Employee contribution limit*||$14,000||$20,500||$6,500, or 46%|
|Catch-up contribution*||$3,000||$6,500||$3,500, or 117%|
|Total employee contributions||$17,000||$27,000||$10,000, or 59%|
Provide employer contribution flexibility. SIMPLEs require employer contributions in set amounts as described above.
Alternatively, 401(k) plans have much greater flexibility, allowing a more generous, a smaller, or even no matching or nonelective contribution.
Access more tax advantages. SIMPLEs only allow for pretax retirement savings, while 401(k)s can offer pretax, Roth, and after-tax savings options. For people who expect to be in a higher tax bracket in retirement, being able to tax their money today is an attractive option.
Create a personalized plan design. SIMPLEs are very limited in their plan design flexibility. In contrast, 401(k)s and other qualified plans allow for more customization to meet the needs of plan participants and employers.
Increase rollover options. SIMPLE IRAs can only be rolled over to other SIMPLE IRAs within the first two years of participation in the SIMPLE IRA. After two years, SIMPLE IRAs can be rolled over to other IRAs and certain retirement accounts. SIMPLE 401(k) accounts and 401(k) accounts can generally be rolled over to any other retirement account at any time, subject to the plan’s conditions.3
Building your business with SIMPLE migrations
SIMPLEs may be the right retirement plan solution for many plan sponsors. But as companies grow beyond 100 employees or look to expand their retirement package, you have the opportunity to educate them on the benefits of traditional 401(k) plans and how these 401(k) plans can be customized to align with their goals. Know the key differences between SIMPLE IRAs, SIMPLE 401(k) plans, and traditional 401(k) plans to build your business and help these plan sponsors evaluate and advance their retirement programs.
1 “Retirement Markets 2022: Market Analysis, Commentary, & Trends,” Retirement Insights, LLC, February 2022. 2 Subject to a two-year grace period if total employees exceed 100. 3 There are advantages and disadvantages to all rollover options; participants are encouraged to review their options to determine if staying in a retirement plan, rolling over to an IRA, or another option is best for them.
Intended for financial professional use.
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made herein.