Many workers value employer sponsored 401(k) retirement plans. Consequently, offering a 401(k) may help a small company attract and retain high-quality employees. Offering a standard 401(k) plan can involve considerable administrative time and expense, but business owners with fewer than 100 employees may find a practical solution in a SIMPLE 401(k).
SIMPLE 401(k) plans are very similar to the traditional 401(k)s from major employers. Eligible employees can contribute part of their compensation to the plan; workers owe no income tax on the contributed amount and can choose how the money is invested, picking from a menu of choices.
Describing the differences
There are differences between SIMPLE 401(k) plans and the traditional version. In 2015, the maximum employee contribution to a SIMPLE 401(k) plan is $12,500, or $15,500 for those 50 or older. (In a traditional version, those numbers are $18,000 and $24,000.) In a traditional 401(k), employer matching is optional, but SIMPLE 401(k) plans require a match.
The required SIMPLE 401(k) match can be dollar-for-dollar, up to 3% of compensation for all participating employees. Alternatively, employers can contribute 2% of compensation for all eligible employees, regardless of whether they contribute to the SIMPLE 401(k). All SIMPLE 401(k) contributions, from employers and employees, are fully vested.
Assessing the advantages
Why would you offer a retirement plan that requires an employer match? Especially a plan with lower contribution limits than a traditional 401(k)?
For one reason, the 401(k) label can help send the message that your company provides excellent employee benefits. Pointing out the required employer match can emphasize that idea, as some traditional 401(k) plans don’t have matching contributions.
In addition, SIMPLE 401(k) plans live up to their names because they don’t require discrimination testing. In the traditional version, employers must go to considerable lengths to show their plan doesn’t favor highly-paid executives. If lower-paid workers fail to participate adequately in a traditional 401(k), key employees may find their permissible contributions reduced. That won’t be an issue with a compliant SIMPLE 401(k).
Compared with SIMPLE IRAs (which are similar in many respects), SIMPLE 401(k) plans require more administration. You must file IRS Form 5500 each year, for example. Still some employees and prospective employees may respond more favorably to the 401(k) label, which might sound more like a workplace plan and may offer plan loans, which SIMPLE IRAs don’t have. That flexibility can add to a plan’s appeal to workers (but may add to an employer’s paperwork burden).
If this type of simple retirement plan might work for your company, you have until October 1 to decide on establishing a plan for 2015.