Last Updated: April 28, 2023

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Small Business 401(k) Plan Overview

A SIMPLE 401(k) allows small businesses to help their employees save for retirement. Establishing a SIMPLE 401(k) plan also helps small businesses attract and retain talented workers. Many employees have come to expect a 401(k) as part of their benefits package.

With a 401(k) plan, employees can contribute a percentage of their salaries to the fund, while employers can choose to make matching contributions. Employers also have the option to increase participation by automatically enrolling employees, then giving them the choice to opt out.

For matching contributions, employers are required to match each dollar an employee contributes up to 3 percent of his or her annual salary. With automatic enrollment plans, employers must contribute 2 percent of an employee’s salary. All contributions to the fund are immediately 100 percent vested, meaning the employee has rights to the money from day one.

Small Business 401(k) Plan Pros

  • Loans are allowed - With a SIMPLE 401(k), an employer can choose to include loans as a feature of the plan. Employees can borrow against the money in their 401(k) by agreeing to pay a penalty.
  • Compatible with other plans - Employers can opt to maintain a second retirement plan that covers employees who are not eligible to participate in the company’s 401(k) plan.

Small Business 401(k) Plan Cons

  • Age restrictions - With most SIMPLE 401(k) plans, employees must be at least 21 years old to participate. Many plans also limit enrollment to those who have been employed at least one year.
  • Broad compensation cap - All employer contributions are subject to a compensation cap, set at $250,000 for 2012. This means a company may contribute a 3 percent match only up to $250,000 in annual salary, even if an employee makes more.


Simple IRA Plans Overview

A SIMPLE IRA is another type of investment plan that allows small businesses to help their employees save for retirement. Eligibility requirements are identical to that of SIMPLE 401(k)s: Any employer with fewer than 100 employees who earned $5,000 or more in the previous year can opt into the plan.

SIMPLE IRAs share many similarities to SIMPLE 401(k)s. Employees can contribute a percentage of their salaries to the fund, while employers can choose to make matching contributions. Automatic enrollment is also available; the contribution requirements are identical to that of of SIMPLE 401(k)s; and all contributions are 100 percent vested immediately.

However, there are a couple differences between the two plans that may make one or the other more attractive to certain employers.

Simple IRA Plan Pros

  • No age requirement - Unlike SIMPLE 401(k)s, there is no minimum age requirement for employees to participate in the plan.
  • No broad compensation cap - With a SIMPLE IRA, only automatic enrollment plans (also called non-elective plans) are subject to the $250,000 compensation cap.
  • Matching flexibility - Unlike SIMPLE 401(k)s, employers have the option to reduce the amount of their match to 1 percent for two out of every five years.

Simple IRA Plans Cons

  • Loans not allowed - As with all IRA-based plans, loans are not allowed. Employees will not be able to borrow against the funds in their SIMPLE IRA.
  • Not compatible with other plans - Employers who maintain a SIMPLE IRA plan typically are not allowed to maintain any other type of retirement plan. However, exceptions do exist for unionized employees.

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