The Basics of a Simple IRA and a Simple 401k

Small business owners can easily be confused between the pros and cons of a Simple IRA and a Simple 401k retirement plan for their employees. Both programs have a lot of similarities, but there are also plenty of areas where they differ. As a result, there is usually a right and wrong choice in the matter. Don’t be one of those small business owners who consider it a toss-up decision with no real consequences. It can be be a very boring subject, but make sure you put the time in to make the best decision for your company.  Today, let’s review the basics of each plan.

Understand the Requirements

In both cases, employers cannot have more than 100 employees who made at least $5,000 in the prior year. If they opt for a Simple 401k, they cannot offer any other retirement plan for employees who are participating in the Simple 401k. They can, however, offer an alternative option for those who are not eligible for the Simple 401k.

If the business owner opts to offer a Simple IRA, he or she will not be allowed to offer any other plan at all. There are certain specific exceptions, such as in cases which collective bargaining dictates otherwise. Still, those are relatively rare.

Employees must be 21 years of age and have at least one year of service to be eligible for a Simple 401k.  They need to only earn at least $5,000 during two prior years to be eligible for the Simple IRA with an expectation of meeting that earnings requirement again in the coming year.

Generally, the business owners may opt to make the requirements less strict in order to offer the plan to more employees.


In the case of either plan, there is the 60-day notification requirement. This gives employees a 60-day window to participate in the plan and the notification must be made each year. Employers may establish the plans anytime from January through October; which gives their employees time to make contributions before the end of the year rolls around.

Availability of Loans

A Simple IRA plan does not allow loans, but they are able to be included in a Simple 401k. Some employees will certainly appreciate the option to receive loans from their plan if they are in need of accessing their retirement accounts before they are eligible to get payments. These can be especially valuable to employees if they are forced to tap into their retirement accounts to overcome unexpected hardships.

Types of Contributions

These are the same across both programs. Employees can defer salary into contributions, and the company may match contributions if they so choose. Generally, employees will match dollar-for-dollar up to three percent of the employee’s pay. For non-elective contributions, employers donate two percent of the compensation of the employee.

There are different rules, however, for each program. In a Simple 401k, employer contributions are subject to a compensation cap. However, in a Simple IRA, only the employer contributions that are non-elective have to fall under the compensation cap.

Ability to Reduce Matching

In a Simple IRA, the company can choose to reduce matching contributions to somewhere lower than three percent, but no lower than one percent for two out of every five years. That may give the employer some flexibility to weather lean times a little bit more easily. This option is not available in the Simple 401k, so that is something to keep in mind if you as an owner feel that matching the contributions up to three percent may be an issue sometimes.

Final Considerations

It is important to make a good decision with regard to a retirement plan, as it can play a key role in attracting talented workers into your business.  It will also impact your company financially; while also creating the possibility to take certain tax deductions. Be sure to consult with a business retirement planning specialist and then have your CPA confirm your proposed course of action.

Remember, running a business successfully does not need to be complicated.  Keep it simple!

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