Q: We are evaluating which retirement plan to implement for our business. What are the advantages and disadvantages of a SIMPLE IRA retirement plan versus a 401 (k) retirement plan?
The problem: understanding the differences between SIMPLE IRA and 401 (k) retirement plans
Many small and medium-sized businesses delay implementing a retirement plan because they don’t understand the key differences between two of the most common types of plans.
The solution: learn the differences
Number of employees
Businesses with 100 or fewer employees may offer a SIMPLE IRA (Small Employer Employee Savings Incentive Matching Plan). Businesses that have one or more employees may offer a 401 (k) plan.
Employee contribution limits
A SIMPLE IRA allows employees to contribute up to $ 11,500 in salary deferrals before taxes or $ 14,000 if they are age 50 or older. A 401 (k) allows employees to contribute up to $ 16,500 in post-tax or pre-tax wage deferrals or $ 22,000 if they are age 50 or older.
Like a Roth IRA, the Roth version of the 401 (k) allows after-tax contributions (with significantly higher limits than a Roth IRA). Unlike a Roth IRA, relatively high-income employees can still make contributions.
Employ contribution limits
A SIMPLE IRA requires employers to match employee contributions with 100% of the first 3% of compensation (can be reduced to as low as 1% in 2 out of 5 years) or contribute 2% of compensation of each eligible employee (with a Limit of $ 245,000).
A 401 (k) does not require employers to match or contribute. A 401 (k) allows, on a combined employer and employee basis, contributions up to the lesser of 100% of compensation (capped at $ 245,000) or $ 49,000. With a 401 (k), employers can deduct amounts not to exceed 25% of total compensation for all participants and all salary reduction contributions.
The new comparability, also known as age-weighted, is a type of 401 (k) plan design that maximizes the amount contributed to a select group (typically the business owner and other key employees) while minimizing the total cost of employee contributions.
Confer
A SIMPLE IRA requires that employee salary reduction contributions and employer contributions be purchased immediately at 100%. A 401 (k) requires that employee salary reduction contributions be purchased immediately at 100%. With a 401 (k), employer contributions can be consolidated over time according to the terms of the plan. Employers can use a 401 (k) vesting program to control employee turnover and reward dedicated employees.
Administration
A SIMPLE IRA is a low-cost or no-cost plan for the employer that does not require an annual IRS filing. A 401 (k) is a low-cost employer plan that requires an annual IRS filing, which is often provided by the 401 (k) provider. Depending on the design of the plan, a 401 (k) may require evidence of employee discrimination.
Summary
Since each plan offers certain advantages and disadvantages, speak with a retirement planning expert before making a decision.
Action steps
Implement a SIMPLE IRA or 401 (k) retirement plan. It will offer a powerful benefit to hire new employees and retain existing employees.
