SIMPLE 401(k) (Business)
A SIMPLE 401(k) plan is a less complex employer-sponsored retirement plan that allows eligible employees to make salary-deferral contributions on a pretax basis.
Commonly referred to as SIMPLE 401(k) plan and SIMPLE employer-sponsored retirement plan
Do I Qualify for the SIMPLE 401(k) (Business)?
SIMPLE 401(k) plans allow businesses with fewer than 100 employees to offer a salary-deferral retirement plan to employees without some of the administrative complexities of a traditional 401(k) plan.
2022 SIMPLE 401(k) (Business) Details
SIMPLE (short for “Savings Incentive Match Plans for Employees of Small Employers”) 401(k) plans allow businesses to offer a salary-deferral retirement plan to employees without being subject to the nondiscrimination and “top-heavy” rules that make traditional 401(k) plans more difficult and costly to administer. SIMPLE 401(k) plans are an option for businesses with no more than 100 employees who earned $5,000 in the previous calendar year, as long as the business does not offer any other retirement plans.
Employers who offer a SIMPLE 401(k) are required to make either:
• A matching contribution to the accounts of participating employees, or
• A nonelective contribution on behalf of each eligible employee, regardless of participation.
Matching contributions are made on a dollar-for-dollar basis for no less than 1% and no more than 3% of the employee’s contributions. Nonelective contributions are calculated at 2% of each employee’s compensation, up to certain limits, and deposited into every employee’s account regardless of whether the employees contribute any of their salary. Employee salary reduction contributions are capped annually at an inflation-adjusted limit. All SIMPLE 401(k) contributions, including employer contributions, are 100% vested from the start.
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• The plan is not subject to the nondiscrimination rules that apply to traditional 401(k) plans.
• Employees are fully vested in all contributions.
• A straightforward benefit formula allows for easy administration.
• Optional participant loans and hardship withdrawals add flexibility for employees.
• No other retirement plans can be maintained.
• Withdrawal and loan flexibility adds administrative burden for the employer.
• The employer must file a Form 5500 annually.
• Employer contributions of 1%–3% of compensation per employee are required.
Assumptions When Taking the SIMPLE 401(k) (Business)
• The employer wishes to make a 3% contribution to all eligible employees.
• All employees are capped at the maximum annual compensation limit.
• All employees make contributions to the SIMPLE plan.
• Traditional 401(k) (Business)
• SIMPLE IRA (Business)
• Solo 401(k) (Business)
• Simplified Employee Pension (SEP)
• Cash Balance Plan
Requirements to Claim the SIMPLE 401(k) (Business)
• The business may not exceed 100 employees who earned $5,000 or more during the previous calendar year.
• The business cannot currently have any other retirement plans.
• The employer must notify each employee of the following information before the beginning of the election period (generally, the 60-day period before January 1, with some exceptions).
• Employers are required to contribute each year either a matching contribution between 1% and 3% of compensation (without limitation) for employees who contribute to their own accounts, or a nonelective contribution of 2% of salary for each eligible employee, regardless of whether the employee contributes. The 2% contribution requirement is capped at a set compensation amount, adjusted annually for inflation.
Business Entities That Can Claim the SIMPLE 401(k) (Business)
• Schedule C
• Schedule F
• S Corporation
• C Corporation
The material discussed on this page is meant for general illustration and/or informational purposes only and is not to be construed as investment, tax, or legal advice. You must exercise your own independent professional judgment, recognizing that advice should not be based on unreasonable factual or legal assumptions or unreasonably rely upon representations of the client or others. Further, any advice you provide in connection with tax return preparation must comply in full with the requirements of IRS Circular 230.