SIMPLE 401(k) Plan Basics
In Part 5 of this series we looked at the specifics of the SIMPLE IRA plan. Now let’s examine its “close cousin,” the SIMPLE 401(k).
A SIMPLE 401(k) plan is a combination of a regular 401(k) plan and a SIMPLE IRA. When would a business choose this plan over a SIMPLE IRA or regular 401(k) Plan? NOT OFTEN. The SIMPLE 401(k) doesn’t provide meaningful advantages when compared to the SIMPLE IRA or 401(k) plan
SIMPLE 401(k) vs SIMPLE IRA
| Plan Type | Contribution Limits | Setup | Administration | Plan Eligibility | Loans Allowed? |
|---|---|---|---|---|---|
| SIMPLE 401(k) | Same | Plan Document | More | 1,000 hours/year | Yes |
| SIMPLE IRA | Same | Easy—IRS Form | Less | < 1,000 hours/year | No |
- A SIMPLE 401(k) plan has more administrative requirements so an outside consultant will be needed. A plan can use 1,000 hour requirement for eligibility, but long-term part-time (LTPT) employees must be allowed to enter a SIMPLE 401(k) and receive employer contributions. LTPT rules do not apply to a SIMPLE IRA.
- A SIMPLE 401(K) provides flexibility allowing for participants to take loans.
If the above advantage is important to the business, it likely makes sense to go with a regular 401(k) plan, as it will provide more flexibility, higher contributions and similar administrative costs.
SIMPLE 401(k) vs 401(k)
| Plan Type | Contribution Limits | Setup | Administration | Plan Eligibility | Loans Allowed? |
|---|---|---|---|---|---|
| SIMPLE 401(k) | Lower | Plan Document | Similar | 1,000 hours/year | Yes |
| 401(k) | Higher | Plan Document | Similar | 1,000 hours/year | Yes |
Lower contribution limits, and no real advantages.
➜ Practical Tip: The SIMPLE 401(k) plan is an uncommon solution for most businesses, as it provides no real advantages you can’t get from either the SIMPLE IRA or regular 401(k) plan.
Your business is unique, so call a expert to help you determine the best retirement plan for your particular situation.
