What is a SIMPLE 401(k)?

A SIMPLE 401(k) combines features of a traditional 401(k) and a SIMPLE IRA, giving small businesses an easier way to offer retirement benefits. Employees can make pre-tax salary deferrals, and employers are required to make contributions on their behalf.

What Is a SIMPLE 401(k)?

SIMPLE stands for Savings Incentive Match Plan for Employees. A SIMPLE 401(k) is a retirement plan designed specifically for small employers. Like other qualified retirement plans, contributions generally grow tax-deferred until withdrawn.

Employees can choose to contribute part of their wages to the plan through payroll deductions instead of receiving those amounts in their paycheck. In return, the employer must make either matching or nonelective contributions.

How Does a SIMPLE 401(k) Work?

A SIMPLE 401(k) is established through a written plan document that allows both employee and employer contributions.

Employee contributions:

• Made through salary reduction elections
• Generally reduce current taxable income
• Grow tax-deferred until distribution

Employer contributions:

• Required every year
• Must be either:
  • A matching contribution based on employee contributions, or
  • A nonelective contribution made for eligible employees regardless of whether they contribute

Because employer contributions are mandatory, employees receive retirement funding even if they contribute little or nothing themselves, depending on the contribution method chosen.

Who Can Establish a SIMPLE 401(k)?

A business may establish a SIMPLE 401(k) only if it meets certain eligibility requirements.

Generally, you can maintain a SIMPLE 401(k) if:

• You had 100 or fewer employees who received at least $5,000 in compensation during the preceding calendar year.
• You do not maintain another retirement plan that covers the same employees.

When counting employees, you must generally include:

• Full-time employees
• Part-time employees
• Seasonal employees
• Self-employed individuals with earned income

The employee count includes anyone employed during the year, even if they are not eligible to participate in the plan.