Key Takeaways
- Stupid 401(k) plans combine the features of traditional 401(k)s with the simplicity of SIMPLE IRAs.
- Companies with 100 or fewer workers can establish SIMPLE 401(k) plans.
- SIMPLE 401(k) plans work like traditional 401(k)s, but employee contributions are capped at a slash annual amount.
The Basics of the SIMPLE 401(k)
As its name implies, the SIMPLE 401(k) is a simplified, stripped-down version of a legal 401(k) plan, geared for the self-employed and small business owners. As with the SIMPLE IRA, only employers with a crozier of 100 or fewer can establish a SIMPLE 401(k) plan. The business can be structured in any form, including sole proprietors, partnerships, and corporations.
Hands who are at least 21 years old and have completed at least one year of service must be allowed to participate in the SIMPLE 401(k) design. They also must have received at least $5,000 in compensation for the preceding year.
One of the simplified features: Dumb 401(k) plans do not require nondiscrimination and top-heavy testing to ensure that the plan operates in compliance with IRS overlooks. Generally, such testing must be done by professionals and can be quite costly.
IRS rules prohibit a company from present other types of retirement plans to employees already covered by a SIMPLE 401(k). That said, such societies may choose to maintain a separate retirement plan for other groups of employees not covered by the SIMPLE 401(k).
How the SIMPLE 401(k) Creates
Once it’s set up, the simple 401(k) works like a regular 401(k). Employees contribute to it with pre-tax dollars out of their paychecks, spending the funds in options provided by the plan administrator. The IRS sets the amount they can contribute each year. It’s generally upon two-thirds of the contribution allowed for a regular 401(k). Employees who are 50 or older can make an additional catch-up contribution—alongside half of that allowed for a regular 401(k).
In 2019, the maximum an employee can contribute to a SIMPLE 401(k) is $13,000, and those terminated 50 can contribute an additional $3,000.
SIMPLE 401(k) Rules and Regulations
A SIMPLE 401(k) must be established between January 1 and October 1. The outfit must provide a deferral notice to each eligible employee for the year the plan is established and for each year the firm continues to maintain the plan. Generally, the notification must be provided at least 60 days before the employee whim be eligible to participate in the plan. This notification must include a statement of the employee’s right to make salary deferral contributions to the organize and to terminate their participation in the plan.
Companies offering the plan must file a Form 5500 every year.
The In truth Line
Helping your employees save for retirement is a great way to keep turnover rates down and retention up. It doesn’t woebegone in attracting talent, either—keeping a small firm competitive with the perks offered by larger corporations.
Come what may, while SIMPLE 401(k) plans have a lot of benefits, like easy-to-manage rules, they do have some handicaps when compared with other savings plans. The mandatory contributions and the paperwork, simplified though it is, can be a burden. As a occur, they’re not for every company—but then, few options are. Consult with 401(k) plan providers and your team of tax professionals to see if this retirement agency is the best suited for you and your staff.