SIMPLE 401(k)

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on August 10, 2023

Are You Retirement Ready?

A SIMPLE 401(k) is a type of defined-contribution plan that employers can offer to their employees.

The SIMPLE in SIMPLE 401(k) is short for Savings Incentive Match Plan for Employees of Small Employers.

This type of 401(k) has very specific rules about what kind of contributions and vesting schedule the employer must use.

SIMPLE 401(k) can also be known as a safe-harbor plan, because the employer doesn't have to worry about constructing a plan that complies with many rules and restrictions.

Have questions about SIMPLE 401(k) Plans? Click here.

How Does It Work?

A SIMPLE 401(k) is much like the traditional 401(k), except that it has fewer rules than the latter.

It gives the employer more freedom to design a plan for his or her employees' retirement needs.

For example, an employer could offer SIMPLE 401(k)s to his entire staff or just some employees; traditional 401(k)s, on the other hand, must be offered to all full-time employees.

The SIMPLE 401(k), like the traditional 401(k), is funded by both employee and employer contributions.

It can have a salary-deferral arrangement where the employee defers a portion of their wages to be withheld and placed in the SIMPLE 401(k).

Who Can Participate in a SIMPLE 401(k)

The SIMPLE 401(k) must be made available to all employees who work at the company, regardless of their age or employment status.

Employers also have the option of excluding employees from SIMPLE 401(k).

Benefits of a SIMPLE 401(k)

  • It is simple to maintain and administer: Administrators must be aware of their SIMPLE 401(k) responsibilities at all times.

  • It is simple to design: SIMPLE 401(k)s can be designed and adopted quickly and easily, with little or no assistance from qualified financial professionals.

  • It is simple for employees to understand: SIMPLE 401(k)s follow the same rules as traditional 401(k)s so employees do not have to learn a new system.

  • It is simple (and legal) to fund: SIMPLE 401(k)s allow employers to make simple, on-time, and complete contributions for their employees' benefit.

Drawbacks of a SIMPLE 401(k)

  • Taxes: SIMPLE 401(k)s must meet Internal Revenue Service (IRS) SIMPLE 401(k) requirements to ensure that the simple 401(k) is qualified and that contributions are untaxed until withdrawn from the simple 401(k).

  • Contributions: SIMPLE 401(k)s must perform very specific actions, such as making simple employer contributions to the SIMPLE 401(k), in order to be qualified.

  • Vesting: SIMPLE 401(k) participants may not have the same vesting schedules as traditional 401(k) participants. It is important that employees understand how SIMPLE 401(k) vesting differs from traditional 401(k) vesting before they participate in a SIMPLE 401(k).

Alternative For a SIMPLE 401(k)

Here are some possible alternatives to the SIMPLE 401(k):

  • Traditional 401(k): The employer must make required contributions to the SIMPLE 401(k), but employees have lower contribution limits, greater flexibility in investments and more complex transactions than SIMPLE 401(k) plans.

  • SIMPLE IRA: Participants in a simple IRA cannot contribute more than $12,000 per year, which is significantly lower than the SIMPLE 401(k) contribution limit for small businesses, which is $54,000 per year.

  • SEP (Simplified Employee Pension): This SIMPLE IRA is for small businesses with 100 or fewer employees. It has simple, lower contribution limits than SIMPLE 401(k) plans but may require the employer to make more complicated contributions.

The Bottom Line

Although SIMPLE 401(k)s are simple to administer, they may not be simple for employees, especially when it comes to paying taxes on SIMPLE 401(k) contributions.

Employers must also comply with SIMPLE 401(k) plan rules in order to maintain their qualified status and avoid taxes on the SIMPLE 401(k).

If you are not sure how SIMPLE 401(k)s work, do not have the time or resources to research SIMPLE 401(k) requirements, or are looking for an easier way to administer SIMPLE 401(k) contributions, consider using another employer-sponsored retirement plan.

SIMPLE 401(k) FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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