Choosing the best 401(k) plan for your company starts with the right information, even with small business retirement plans. A SIMPLE 401(k) plan is one of many options that SaveDay provides to give your employees the right tools to invest toward retirement. Let’s look at what a SIMPLE 401(k) is and how it differs from a typical 401(k).
What is a SIMPLE 401(k) plan?
SIMPLE 401(k) plans, or Savings Incentive Match Plan for Employees 401(k) plans, were designed as low-cost small business retirement plans.
To qualify, businesses must have fewer than 100 employees, and those employees received at least $5,000 in compensation from the previous year. Employers also cannot offer any other retirement accounts open (including IRAs). SIMPLE 401(k) plans also include a mandatory employer-matched contribution. There are two options for calculating these contributions, they are:
- a dollar-for-dollar matching contribution of up to 3% of pay for each qualified employee, or
- a non-elective contribution of 2% of pay for each eligible employee.
As with other 401(k) plans, filing the annual Form 5500 is required. (Regulatory filings are managed and included with every active SaveDay plan).
SIMPLE 401(k) – Pros and Cons
Consider the following pros and cons when deciding whether or not to offer a SIMPLE 401(k)s to your employees:
With a SIMPLE 401(k), small businesses and their employees can save for retirement more easily.
- Most 401(k) plans are subject to nondiscrimination testing and additional compliance requirements. This is to ensure that plan sponsors follow IRS regulations, whereas a SIMPLE 401(k) is not.
- SIMPLE 401(k)s are popular among small firms wishing to offer retirement plans at a lesser cost than regular 401(k) plans. This is because they are less expensive and easier to operate when it comes to administrative duties. (At SaveDay, we can set you up with any 401(k) plan at no cost and in 15 minutes.)
- Employers can also benefit from the same tax advantages that traditional 401(k) plans receive.
While there are some benefits to this type of plan, it also has a few drawbacks.
- Larger organizations are not eligible for a SIMPLE 401(k). Companies must have fewer than 100 employees. All plan participants must also be at least 21 years old. This may preclude younger employees from participating.
- Employees vest all employer contributions at an instant. Meaning employees can access all their funds in their account.
- Employer contributions are mandatory with SIMPLE 401(k) plans.
SIMPLE 401(k) vs. 401(k)
In terms of tax benefits, a SIMPLE 401(k) is comparable to a traditional 401(k). Money’s invested pre-tax, so the entire value of each dollar goes into an investment portfolio.
Like a traditional 401(k), participants who need emergency cash can pull out loans from their SIMPLE 401(k) accounts. This is different from a withdrawal. A Withdrawal, depending on the circumstances, might result in a 10% percent penalty for people under the age of 59½. There are also hardship withdrawals available with both plans.
The SIMPLE 401(k) plan is easier to manage than a regular 401(k). Traditional 401(k)s must be tested regularly to ensure that they are not becoming too top-heavy.. None of this testing is necessary with a SIMPLE 401k.
Also, all contributions to a SIMPLE 401(k) are immediately vested. Regular 401(k)s may be subject to a vesting schedule; thereby, delaying vesting funds until a later date. Keep in mind that maximum contribution limits are lower than other retirement-savings vehicles. A regular 401(k)’s contribution maximum is $20,500 in 2022. However, SIMPLE 401(k) participants can only contribute $14,000 in the same year. ”Catch-up” contributions of $3,000 per person are also available to SIMPLE 401(k) participants who are 50 years old and older. $6,500 is the catch-up contribution for regular 401(k)s.
Is a SIMPLE 401(k) Right for Your Business?
Supporting your employees with small business retirement plans is a great way to cut down on turnover and boost retention. A SIMPLE 401(k) plan can empower your employees to save for retirement while working for your company.
Contact SaveDay to find out if a SIMPLE 401(k) plan is right for your business. Remember, the size of your company shouldn’t affect whether or not one can offer retirement plans to their employees. There’s an affordable and well-designed plan for everyone. Our 401(k) specialists at SaveDay can point you in the right direction, so you can pick the best plan possible. Start today, here!