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Key Takeaways
- SIMPLE 401(k) plans are tailored for small businesses with fewer than 100 employees, offering simpler administration and mandatory employer contributions.
- Employees can contribute up to $16,500 in 2025, with catch-up contributions of $3,500 for those aged 50+, and higher limits for ages 60–63 under SECURE 2.0.
- Employer contributions must be either matching (up to 3%) or non-elective (2%), with immediate full vesting.
- Participants can take loans from their accounts, unlike SIMPLE IRAs, and enjoy simplified rules without certain non-discrimination testing requirements.
- Drawbacks include lower contribution limits than traditional 401(k) plans, limited availability for larger companies, and exclusivity restrictions on other retirement plans.
- Alternatives include SIMPLE IRA and SEP IRA, which differ in contribution limits, vesting, and loan provisions.
- Implementing a SIMPLE 401(k) can enhance employee retention, attract talent, and help employees achieve long-term retirement savings goals.
Choosing a retirement savings plan for your small business can be tough, but a SIMPLE 401(k) is a great option to consider. This guide will break down everything you need to know about SIMPLE 401(k) plans, making it easy to see if it’s the right fit for you and your employees. We’ll cover who’s eligible, how much you can contribute, and the tax benefits that come with it. With this information, you can make an informed decision to help you and your employees reach your retirement goals.
What is a
SIMPLE 401(k)?
Key Features
- SIMPLE 401(k) plans are available only to businesses with 100 or fewer employees.
- Employers must make either a matching contribution up to 3% of salary or a nonelective 2% contribution for each eligible employee.
- Annual employee contributions are capped at $16,500 for 2025, with a $3,500 catch-up limit for those aged 50+, make a total $20,000, but under SECURE 2.0 provisions, higher catch-up limits may apply—up to $3,850 or even $5,250 for employees aged 60 to 63, depending on the specific plan.
- Both employer and employee contributions are fully vested as soon as they are made.
- Participants can take loans from their SIMPLE 401(k), unlike with SIMPLE IRA plans.
- These plans are not subject to certain non-discrimination testing, making administration easier for small businesses.
SIMPLE 401(k) Rules and Regulations
Eligibility
Employees must be at least 21 years old, have completed one year of service, and received at least $5,000 in compensation from the employer in the previous year to participate.
Withdrawal Restrictions
Funds are generally intended to stay in the account until age 59½; early withdrawals incur a 10% penalty.
Employer Notification Requirement
Employers must provide eligible employees with important notifications about the plan-including information on salary deferral options and the right to terminate participation-at least 60 days before they become eligible and annually thereafter for as long as the plan is in place.
How SIMPLE 401(k) Plans Works?
The SIMPLE 401(k) is a straightforward alternative to the regular 401(k) plan, specifically tailored for self-employed individuals and small business owners. Similar to SIMPLE IRA accounts, only employers with a staff of 100 or fewer can set up SIMPLE 401(k) plans, accommodating various business structures like sole proprietors, corporations, and partnerships.
In essence, SIMPLE 401(k)s operate much like traditional 401(k) plans.
Employees contribute a portion of their pre-tax income from their paychecks, investing these funds in options provided by the plan administrator. However, there are IRS-imposed limits on annual contributions, about two-thirds of those allowed for standard 401(k) plans. In 2024, employees can contribute a maximum of $16,000, increasing to $16,500 in 2025. Additionally, individuals aged 50 and over can make an extra catch-up contribution of $3,500 annually in both 2024 and 2025.
Employer contributions to a SIMPLE 401(k) are capped based on employee compensation. This cap was $345,000 in 2024 and rose to $350,000 in 2025. This sets the SIMPLE 401(k) apart from the SIMPLE IRA. Unlike traditional 401(k) plans, employers are required to make either a matching contribution-up to 3% of each employee’s salary-or a nonelective contribution equivalent to 2% of each eligible employee’s pay.
Confused about 401(k) contribution limits? Learn more about how much you can contribute in 2025 and 2024 to maximize your retirement savings. Check out our guide on 401(k) Contribution Limits and Deadlines!
Benefits & Drawbacks
Benefits of a SIMPLE 401(k) Plan
While traditional 401(k) plans are well-known, SIMPLE 401(k) plans offer an alternative that both employers and workers might find appealing. Choosing between them depends on practical benefits. Here’s why SIMPLE 401(k) plans can be attractive
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Full Ownership
Employees have complete control over all contributions, whether from themselves or their employer. This flexibility lets eligible employees access funds when needed.
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Borrowing Possibilities
Like regular 401(k) plans, participants can take out loans against their SIMPLE 401(k) accounts. This option isn’t available with SIMPLE IRA plans, making it useful for managing unexpected financial needs. Also, hardship withdrawals are an option.
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Simplified Rules
Unlike traditional 401(k) plans, SIMPLE 401(k) plans don’t have to comply with certain non-discrimination rules. This is good news for small business owners who want to offer a retirement plan without dealing with extra costs. While larger companies may have to follow these rules, they usually have the resources to handle them.
Drawbacks of a SIMPLE 401(k) Plan
Although SIMPLE 401(k) plans may suit many businesses, it’s essential to understand their limitations before making a decision.
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Contribution Limits
Compared to traditional 401(k) plans, SIMPLE 401(k) plans have lower contribution limits. In 2025, traditional plans allow contributions of up to $23,500, while SIMPLE 401(k) plans cap contributions at $16,500. Similarly, catch-up contributions for employees aged 50 and above are lower in SIMPLE 401(k) plans, at $3,500 versus $7,500 in traditional plans. This difference could pose challenges for employees aiming to maximize their savings.
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Limited Availability
While SIMPLE 401(k) plans are attractive for small businesses, they’re only available to such enterprises. Larger companies with over 100 employees must explore other options, like traditional 401(k) plans, which might come with higher administrative costs.
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Immediate Employer Vesting
In SIMPLE 401(k) plans, both employee and employer contributions are fully vested immediately. This means employees can access their distributions, subject to eligibility, without delay. In contrast, traditional 401(k) plans often have vesting schedules determined by the company, giving them more control over distribution timing.
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Exclusivity of Plans
Choosing a SIMPLE 401(k) plan means employees can’t participate in other retirement plans simultaneously, such as personal IRAs. This restriction may limit individuals seeking diverse avenues for retirement savings, affecting their overall saving potential.
Alternatives to SIMPLE 401(k) Plans
If you’re not sure if a SIMPLE 401(k) is the right fit for you or your company, it might be worth considering some other retirement plans. Here are a few options to think about
SIMPLE IRA
Similar to a SIMPLE 401(k), a SIMPLE IRA operates like a traditional IRA. However, unlike SIMPLE 401(k)s, SIMPLE IRAs don’t allow loans, and employer contributions aren’t subject to vesting.
Want to boost your retirement savings? Learn how a SIMPLE IRA can help. Check out our guide!
SEP IRA
The Simplified Employee Pension (SEP) IRA is open to businesses of any size, and there’s no requirement for employers to file. In a SEP IRA, only the business owner contributes—not the employees. SEP IRAs offer tax-deferred growth, and all contributions are tax-deductible.
Don’t settle for a basic retirement plan. Explore the possibilities of a SEP IRA. Learn more and see if it unlocks a brighter future!
Closing Thoughts
FAQs
What's the difference between a SIMPLE 401(k) and a SIMPLE IRA?
Both are for small businesses, but SIMPLE 401(k)s allow loans and require employees to be 21 or older. SIMPLE IRAs don't allow loans and have no age restrictions.
Can I have both a SIMPLE 401(k) and a traditional IRA?
Yes! You can contribute to both accounts in the same year.
Can I borrow from my SIMPLE 401(k)?
Yes, but borrowing from retirement savings is generally discouraged due to penalties for early withdrawal.
When is the deadline to set up a SIMPLE 401(k)?
The technical deadline is the tax filing deadline (with extensions) for the year you want it to start. However, strict IRS rules apply for it to be effective in the current year.
What happens to my SIMPLE 401(k) if I switch jobs?
The money stays in your account. You can keep it there, roll it over to a new employer's plan (if allowed), or take a distribution (which may be taxed).
SIMPLE 401(k) vs. Traditional 401(k): What's the difference?
- SIMPLE 401(k)
For small businesses (<100 employees), mandatory employer contributions, lower contribution limits, and simpler administration.
- Traditional 401(k)
More plan options, potentially higher contribution limits, and more complex administration for employers.
Who qualifies for a SIMPLE 401(k)?
Generally, you're eligible if you work for a company with 100 or fewer employees and earned at least $5,000 from them in the prior year.
Looking to choose the right retirement plan for your business?
Contact us today for expert guidance tailored to your business’s needs!
