There are a few choices available to small business clients regarding their retirement plan options; chief among them is the SIMPLE IRA (Savings Incentive Match Plan for Employees) and traditional 401k plans.

Joel Mee

Both 401k plans and SIMPLE IRAs allow employees to contribute part of each paycheck to a retirement investment account. The contributions grow tax-free until an employee accesses the funds in retirement. In both plans, employer contributions can lead to even greater savings. However, 401k plans and SIMPLE IRAs have their differences.

While a SIMPLE IRA offers certain benefits to small business owners, a 401k may offer other advantages. For example, 401k plans can be combined with other retirement plans, while SIMPLE IRAs cannot. And as its name implies, the SIMPLE IRA can be easier and less expensive to set up than a 401k plan.

As clients seek guidance and counsel, share the following four key differences to help them consider their options:

1. Employee Contribution Limits

Employees with 401k plans can contribute more to their retirement savings than those with SIMPLE IRAs. In 2022, for example, the 401k-deferral limit for individuals under the age of 50 is $20,500 compared to a deferral rate of just $14,000 for the SIMPLE IRA, and for those over 50, the limits are $27,000 and $17,000, respectively.

The higher contribution limits of a 401k plan mean participants can experience greater savings and lower taxable incomes. In addition, a 401k can help business owners maximize their own retirement savings while providing a richer retirement option to attract talent. Note that there are additional options to the 401k that can help business owners and key employees increase retirement savings.

2. Employer Contributions

With 401k plans, employers can choose whether to match contributions and in what amount. On the other hand, employers with SIMPLE IRA plans are required to contribute to their employees’ retirement accounts. This contribution must match up to 3% of an employee’s annual pay or make a contribution regardless of whether an employee contributes to the plan.

Employers who like the flexibility to decide on the contribution amount might lean toward offering a 401k plan as this flexibility can help them better address the financial needs of their business.

3. Retirement Plan Eligibility

When determining who is allowed to join a plan, a 401k plan gives employers more control with eligibility rules that can help them meet their 401k goals and manage expenses.

Eligibility rules for SIMPLE IRAs, on the other hand, are more restrictive. Employers must offer enrollment to all employees who earned $5,000 in the previous two years and are reasonably expected to earn at least $5,000 in the current year. For some small businesses, this could lead to higher expenses.

4. Vesting Schedules and Retention

Employers who offer a 401k plan can set up a schedule for when employees can be vested in non-safe harbor employer contributions. For example, a company may require six months, one year, or whatever fits their plan objectives of employment before an employee is vested. This requirement can help companies foster employee longevity and help them retain key talent.

Vesting schedules are not allowed with SIMPLE IRAs. Employees in these plans are immediately vested in their employer contributions, which may put companies that offer SIMPLE IRAs at a disadvantage when it comes to employee retention.

For advisors whose clients are considering converting their SIMPLE IRA to a 401k plan, be sure to:



• Ensure the SIMPLE IRA is the plan sponsor’s sole retirement plan and that it has been in effect for the year.
• Inform plan sponsors that their SIMPLE IRAs can’t be terminated mid-year (they would need to be terminated at year-end).
• Ensure plan participants are notified at least 60 days before the SIMPLE IRA is terminated (i.e., before November 2). The soonest a new 401k plan can start is January 1 of the year following the termination of the SIMPLE IRA.[1]

Given these considerations and the continued challenges that exist in the recruitment arena, time is of the essence. For millions of working professionals who are thinking of switching careers, the benefits they are offered may determine whether they accept a certain job offer or continue looking elsewhere. Help your small business clients attract and retain new talent by setting themselves up to meet the expectations of the new labor market successfully.

If your clients are thinking about differentiating their retirement plans and benefits packages, remember that those who make a transition later in the year may find it difficult to fulfill notification requirements and get started the following year. It is not too late to get clients ready for 2023, but you may want to consider seizing the opportunity now to make a change for next year.