A SIMPLE 401(K) plan is a commonly used retirement plan for small businesses across the country. Small employers who cannot afford pre-tax 401(K) plans use a SIMPLE 401(k) plan as an alternative.
The acronym SIMPLE stands for Savings Incentive Match Plan for Employees. This plan is designed specifically for small businesses with no more than 100 employees who earned at least $5,000 during the previous year. Both employees and employers can make contributions to the SIMPLE 401(k) plan.
Here is everything you need to know about SIMPLE 401(k) plans.
What is a SIMPLE 401(K) plan?
A SIMPLE 401(K) plan is a retirement plan that helps small businesses to offer retirement benefits to their employees. Under the SIMPLE 401(k) plan, the employer must have a maximum of 100 employees who earned at least $5,000 in the previous year, according to the Internal Revenue Service (IRS).
The employer and employees can make contributions to the SIMPLE 401(k) plan. All contributions to the employee’s account are 100% vested immediately.
With this A SIMPLE 401(k) plan, the employee can make contributions they want up to the limit. The employer, however, must choose between the following two choices.
- Employers can make a non-elective contribution of 2% of each eligible employee’s pay, or
- A matching contribution (dollar-to-dollar matching) of up to 3% of each employee’s pay
In case the number of employees who made $5,000 goes higher, the employer will have a 2 years transitional grace period to switch to a traditional 401(k) plan.
How much can I contribute to a SIMPLE 401(K)?
The SIMPLE 401(k) contribution limits in 2024 for both employees and employers as as follows:
SIMPLE 401(k) employer contribution limits for 2024
The employer can:
- Match each employee’s pay up to 3% or,
- Choose a non-elective contribution of 2% of every eligible employee.
SIMPLE 401(k) employees’ contribution limits for 2024
The maximum contribution an employee can make to a SIMPLE 401(K) in 2024 is $16,000. Those who are 50 or older can contribute an extra $3,000 to catch up, according to RSM. In other words, people who are 50 or older can contribute up to $19,500.
Employer requirements
Not every employer is allowed to offer a SIMPLE 401(K) plan. At the same time, not every employer can afford to offer bigger and more complex plans. such as traditional 401(k) plan.
The SIMPLE 401(k) is designed only for small businesses and the following are eligibility requirements.
- The company must have no more than 100 employees who earned at least $5,000 in the previous year
- You must file the Form 5500 annually
- You cannot have or offer any other retirement plans
- No other contributions can be made
Benefits and drawbacks of a SIMPLE 401(K) plan
The SIMPLE 401(k) plan offers unique benefits to both employers and employees. The following are the benefits and drawbacks of this retirement SIMPLE 401(k) you should know.
Pros of SIMPLE 401(k) plan.
- The plan is easy to set up and manage due to its simplicity
- The plan allows loan options
- Contributions made to your account are 100 percent vested
Cons of SIMPLE 401(k) plan.
- Employers are not allowed to offer other retirement plans
- Employers are required to file Form 5500 every year
- The plan does not require non-discrimination rules associated with other 401(K) retirement plans
- Max contributions are low
SIMPLE 401(k) early withdrawal penalty
Just like most retirement plans, you will pay taxes and a 10% penalty on withdrawals you make before you turn 59½. Distributions you take from the account while still working for the same company are called in-service withdrawals and the same withdrawal rules apply.
SIMPLE 401(k) RMDs
SIMPLE 401(K) plans come with required minimum distributions(RMDs) when you turn 73. Failure to take these distributions may lead to a 50% penalty on the amount you did not take out on time.
Other accounts that require RMDs include SIMPLE IRAs, SEP IRAs, traditional IRAs, 403(b) plans, 457(b) plans, 401(K) plans, and many more.
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