As a small business owner, you want to keep your employees happy and doing good work. One of the best ways to provide and give back to your employees, even if you only employ yourself, is to provide them with an opportunity to save for retirement.

While it may seem out of reach, it is possible to provide a plan that will benefit both you and your employees. There are few options available, but two are considered the “simple” way to save for retirement: SIMPLE IRAs and SIMPLE 401(k)s.

Both plans offer unique advantages, but choosing the right one for your small to medium-sized business (SMB) can be challenging.

In this article, we’ll break down the differences, similarities, and benefits of each to help you make an informed decision.

What is a SIMPLE IRA?

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a retirement plan designed for small businesses with 100 or fewer employees.

It offers an easy and low-cost way to provide retirement benefits. Employers must either match employee contributions up to 3% of their salary or make a non-elective contribution of 2% of each eligible employee’s salary. Contribution limits are capped at $16,000, giving business owners a higher limit than most standard IRA accounts.

Pros and Cons of a SIMPLE IRA

Pros:

• Simplicity: Easy to set up and maintain with minimal paperwork.
• Low Cost: Generally, administrative costs are lower compared to other retirement plans.
• Immediate Vesting: Contributions vest immediately, giving employees full ownership of the funds right away.
• Employee Contribution: Employees can contribute a portion of their salary pre-tax, reducing taxable income.

Cons:

• Mandatory Employer Contributions: Employers must contribute regardless of business profitability.
• No Loan Option: Employees cannot borrow from their SIMPLE IRA.

Learn more about the pros and cons of a SIMPLE IRA.

What Is a SIMPLE 401(k)?

A SIMPLE 401(k) is another retirement plan option for small businesses with 100 or fewer employees. It combines the features of a Traditional 401(k) with the simplicity of a SIMPLE IRA.

Employers must make either matching contributions or non-elective contributions similar to those required in a SIMPLE IRA.

Pros and Cons of a SIMPLE 401(k)

Pros:

• Full Vesting: Employees who participate in this plan are fully vested in all contributions.
• Loan Options: Participants can borrow against their 401(k) balance.
• Tax Credits: Businesses may be eligible for tax credits for starting a SIMPLE 401(k).

Cons:

• Administrative Complexity: More paperwork and higher administrative costs compared to a SIMPLE IRA.
• Mandatory Employer Contributions: Similar to SIMPLE IRA, employer contributions are mandatory.
• Testing Requirements: Subject to certain compliance tests to ensure fairness among employees.

Key Differences Between SIMPLE IRAs and SIMPLE 401(k)s

Understanding the key differences between SIMPLE IRAs and SIMPLE 401(k)s can help you make a more informed decision when selecting a retirement plan for your small business.

Both plans offer unique features that cater to different business needs and employee preferences. Here, we break down the most significant distinctions to consider.

• Loan Availability: SIMPLE 401(k) plans allow for loans, while SIMPLE IRAs do not.
• Administrative Requirements: SIMPLE IRAs are easier and less costly to administer compared to SIMPLE 401(k)s.
• Compliance Testing: SIMPLE 401(k)s require annual testing to ensure compliance with IRS rules, whereas SIMPLE IRAs do not.

SIMPLE IRA vs SIMPLE 401(k) Comparison Chart

*If you participate in multiple plans this will reduce your total contribution limit, depending on how much you’ve already contributed to another plan.

Similarities Between SIMPLE IRAs and SIMPLE 401(k)s

While there are distinct differences between SIMPLE IRAs and SIMPLE 401(k)s, they also share several similarities that make them both attractive options for small businesses.

These common features ensure that regardless of the plan you choose, you can provide valuable retirement benefits to your employees while enjoying certain advantages yourself. Here are the key similarities:

• Eligibility: Both plans are available for businesses with 100 or fewer employees.
• Employer Contributions: Employers must make either matching contributions or non-elective contributions in both plans.
• Immediate Vesting: Contributions in both plans vest immediately.
• Tax Advantages: Both plans offer tax advantages for both employers and employees.

Which One Is Right for My SMB?

Choosing between a SIMPLE IRA and a SIMPLE 401(k) depends on your business’s specific needs and goals. If you prefer a simpler, lower-cost plan with minimal administrative responsibilities, a SIMPLE IRA might be the best choice. However, if you want to offer higher contribution limits and the option for employee loans, a SIMPLE 401(k) could be more suitable.

Choosing the right retirement plan for your SMB is crucial for both your business and your employees. At Horizon Trust, we specialize in helping small businesses navigate these decisions with personalized advice and expert insights. Contact us today to learn more about how we can help you select the best retirement plan for your business needs.

For more detailed information or personalized advice, feel free to contact Horizon Trust. We are here to help you make the best decision for your retirement planning needs.

FAQs

What are the eligibility criteria for SIMPLE IRA and SIMPLE 401(k)?

• Both SIMPLE IRA and SIMPLE 401(k) plans are available to businesses with 100 or fewer employees who earned at least $5,000 in the preceding year.

Can employees contribute to both plans simultaneously?

• No, employees cannot contribute to both a SIMPLE IRA and a SIMPLE 401(k) simultaneously within the same employer plan.

Are employer contributions mandatory in both plans?

• Yes, employer contributions are mandatory for both SIMPLE IRA and SIMPLE 401(k) plans, either through matching contributions up to 3% of compensation or a 2% non-elective contribution.