A Guide to SIMPLE 401(k) Plans

A Savings Incentive Match Plan for Employees, or SIMPLE plan, can come in the form of an IRA or a 401(k). While both SIMPLE plans are a lot alike, the 401(k) plan is a little easier to understand and put into place for employers. So if you’re a small business owner, you may want to consider setting up a SIMPLE 401(k) plan for your company and employees. Below, we go over the pros and cons of SIMPLE 401(k) plans, as well as other important characteristics and alternatives.

If you’re looking for ways to boost your retirement savings, a financial advisor can help you create a retirement plan.

What Is a SIMPLE 401(k) Plan?

A SIMPLE 401(k) plan is a mix between a SIMPLE IRA and a traditional 401(k) plan. It has similar benefits to a regular 401(k) plan, but it works for smaller companies that can’t take on big retirement plans for their employees. To qualify for a SIMPLE 401(k), your company needs to:

Have 100 employees or less
Have employees with no other retirement plans (including IRAs)
File a Form 5500 every year

As a company, you can either make a matching contribution of up to 3% of an employee’s pay or a non-elective contribution of up to 2% of an employee’s pay. The deferral limit for 2025 is $16,500, rising to $17,000 in 2026.

Benefits of a SIMPLE 401(k) Plan

Similar alternatives to traditional 401(k) plans are available, but SIMPLE 401(k) plans may be attractive to employers and workers alike. Choosing between one kind of plan and another, though, comes down to tangible benefits. SIMPLE 401(k) plans have some solid advantages, such as:

Fully vested: Employees are completely vested in all contributions, including both their own and those from their employer. This is good news for employees who qualify for distributions, as it allows them to take out money whenever they need it.
Loans available: Like a regular 401(k) plan, you can take out a loan against your SIMPLE 401(k) plan. This isn’t available with a SIMPLE IRA plan. This can be helpful if you need some cash for an emergency and have the funds available in your SIMPLE 401(k). Along with that, hardship withdrawals are available.
No compliance rules: 401(k) plans have non-discrimination rules that apply, while SIMPLE 401(k) plans don’t. This is a benefit to business owners who want to start a retirement plan but may not have the cash flow to pay for administrative costs. Bigger companies face these rules, but usually have the money to afford it.

Drawbacks of a SIMPLE 401(k) Plan

Even though a SIMPLE 401(k) plan may work for many companies, it’s important to consider the downsides.

Even though a SIMPLE 401(k) plan may work for many companies, it’s important to take into consideration the downsides of them as well. Here are some factors to pay attention to before you make your final decision:

Lower contribution limits: For 2026, traditional 401(k) plans allow up to $24,500 in contributions. On the other hand, contributions for SIMPLE 401(k) plans are cut off at $17,000. Catch-up contributions for workers 50 and older are also lower: $4,000 for SIMPLE 401(k) plans and $8,000 for traditional 401(k) plans. This could be a hurtful revelation for workers who want to save as much as possible but feel like they’re limited through this plan.
Limited availability: The SIMPLE 401(k) plan is a great retirement plan for small businesses, but it’s available exclusively to small businesses. Companies that have more than 100 employees need to look for alternative options, like a traditional 401(k). In turn, these companies may pay more in administrative costs.
Immediate employer vesting: Employee contributions are 100% vested, and so are employer contributions. That means workers can receive their distributions, if they qualify, at any time. Traditional 401(k) plans allow vesting after a specific number of years set up by the company, giving it more control.
No other plans: Having a SIMPLE 401(k) plan with your employer means you can’t have any other retirement plan set up, even a personal IRA. If you’re looking for multiple ways to save for retirement, this could limit how much money you can put away.

Should You Get a SIMPLE 401(k) Plan?

Supporting your employees is a great way to keep turnover rates down and retention up. Retirement plans, including SIMPLE 401(k) plans, can help your employees save for their futures while still working for your company.

While SIMPLE 401(k) plans have a lot of benefits, like easy-to-manage rules and the ability to take out a loan, they’re not for every company. Limited availability and low contribution limits might hinder your opportunities.

Alternatives to SIMPLE 401(k) Plans

Retirement plans, including SIMPLE 401(k) plans, can help your employees save for their futures while still working for your company.

SIMPLE 401(k) plans can be appealing for small businesses because of their straightforward rules and required employer contributions. However, they aren’t the only retirement plan option available, and depending on business size, cash flow and long-term goals, another plan type may offer greater flexibility or higher contribution limits. Understanding the main alternatives can help employers choose a plan that better aligns with their needs.

Traditional 401(k) Plan: A traditional 401(k) offers higher employee contribution limits and more flexibility in plan design than a SIMPLE 401(k). Employers are not required to make contributions every year, which can be helpful for businesses with variable profits. However, these plans typically involve higher administrative costs and more compliance responsibilities.
Safe Harbor 401(k) Plan: A safe harbor 401(k) is designed to simplify compliance by requiring mandatory employer contributions in exchange for fewer nondiscrimination testing requirements. This option works well for businesses that want to maximize owner and employee contributions while avoiding complex testing. Employer contributions are generally required every year, which can limit flexibility.
SIMPLE IRA: A SIMPLE IRA is often considered alongside a SIMPLE 401(k) and is typically easier and less expensive to administer. It allows employee contributions and requires employer matching or nonelective contributions, similar to a SIMPLE 401(k). The trade-off is lower contribution limits and fewer plan features.
SEP IRA: A SEP IRA is funded entirely by the employer and works best for self-employed individuals or small businesses with few employees. Contribution limits can be high, but contributions must be made at the same percentage for all eligible employees. This lack of flexibility can make it less attractive for companies with growing or diverse workforces.
Solo 401(k): A Solo 401(k) is designed for business owners with no employees other than a spouse. It allows for very high contribution limits by combining employee and employer contributions. While not suitable for growing teams, it can be an efficient option for independent contractors and sole proprietors.

Choosing the right alternative to a SIMPLE 401(k) depends on factors such as business size, administrative capacity and how much both employers and employees want to save. Each option comes with different costs, rules and contribution limits that can affect long-term retirement outcomes. A financial advisor can help evaluate these alternatives and determine which retirement plan best supports both the business and its employees.

Bottom Line

A SIMPLE 401(k) can be an effective retirement plan for some small businesses, but it’s far from a one-size-fits-all solution. Alternatives like traditional 401(k)s, SIMPLE IRAs, SEP IRAs and Solo 401(k)s each offer different advantages in terms of flexibility, cost and contribution limits. The right choice depends on factors such as business size, cash flow stability and long-term savings goals.

Tips for Retirement Planning

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