What are the differences between a 401(k) and a SIMPLE retirement plan? Skip to content

What are the differences between a 401(k) and a SIMPLE retirement plan?

Companies moving from a SIMPLE IRA to a 401(k) plan are usually seeking some additional flexibility and have outgrown their current SIMPLE plan. The questions arise: What is a SIMPLE retirement plan? And how is it different from a 401(k)?

SIMPLE is an acronym for a Savings Incentive Match Plan for Employees. There two SIMPLE plans, SIMPLE IRA and SIMPLE 401(k). Both are tax-deferred retirement plans provided by employers. The goal of a SIMPLE plan is similar to other retirement plans: to allow employees a simple way to save and invest money for retirement. We've outlined a few of the basics of SIMPLE and traditional 401(k) plans to highlight some important similarities and differences.

Simple IRA

In order to qualify to have a SIMPLE IRA, an employer cannot have more than 100 employees. Employers are required to make a 2% non-elective contribution to all eligible employees, or provide a 3% (of salary) dollar for dollar match on an employee's deferrals. There is no flexibility for other matching or contribution formulas. The annual contribution limit for an employee is $12,500 in 2018, plus $3,000 for a catch-up contribution for a participant over the age of 50.

For distributions and rollovers, a participant must have had their account opened for at least 2 years to make a distribution or rollover without a 25% tax penalty (unless rolling it to another SIMPLE account or if they are over age 59 ¬Ω). Additionally, a SIMPLE IRA does not allow you to take loans and there are no options for vesting of employer contributions.

There are a few reasons why some employers may like these plans, including the following: there are generally no tax filing requirements, no discrimination testing is required, and there are typically very few administrative fees. However, employers tend to dislike the limited flexibility in contributions, rollover limitations, and lack of vesting possibilities.

SIMPLE 401(k)

SIMPLE 401(k) is similar to the SIMPLE IRA in a number of ways. They share the same low contribution limits, the same limit of having less than 100 employees, and the same employer contribution limits of 3% match or 2% non-elective contribution. Employees are also fully vested in all contributions in a SIMPLE 401(k) and there are no additional profit sharing options.

A few primary differences between a SIMPLE IRA and a SIMPLE 401(k) are that loans and hardship withdrawals are permitted in a SIMPLE 401(k). An annual tax filing of Form 5500 is also required with the SIMPLE 401(k).

Some employers prefer SIMPLE 401(k) plans because they are relatively easy to administer and there are no discrimination tests.  Employers tend to dislike the limited employer contribution flexibility, the lack of vesting possibilities, and the lack of discretionary profit sharing.

Traditional 401(k)

Some of the main reasons employers may shy away from a traditional 401(k) are that they can be much more expensive and can take more time to administer. A 401(k) plan is more complex because it offers significantly more options and flexibility than SIMPLE plans.

In a 401(k), employees can contribute $18,500 in 2018, with an additional $6,000 catch-up contributions if over age 55.  An employer can choose to provide a variety of matching and/or profit sharing contributions. This can range from no match, to a discretionary match, a Safe Harbor match at 3.5% or more, or a non-elective contribution. These contributions, with additional profit sharing, can bring the full annual contribution limits to $55,000 for most employees, and $61,000 for those over the age 50. An employer can adopt a vesting schedule for employer contributions ranging from immediate to vesting over 6 years. This may help to promote employee loyalty and retention.

Loans and hardship distributions may also be allowed if an employer opts to do so. While administration and filing requirements of the 401(k) can be tedious, they can be easier with a 401(k) partner that will sign and file your 5500 tax documents, approve loans and distributions, track eligibility, benchmark fees, and even act as your plan fiduciary.


This article was produced in collaboration with HealthEquity Retirement Services, LLC. HealthEquity Retirement Services, LLC is a wholly owned subsidiary of HealthEquity, Inc. Nothing in this communication is intended as legal, tax, nancial or medical advice.

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