Since their creation over 40 years ago, 401(k) plans have taken center stage as the most common way to save for retirement. While 401(k) plans are amazing and offer flexibility, tax advantages and the ability to save for retirement they can also be complex, costly and require a fair amount of administrative labor to operate properly.
We could all use a little “simple" in our lives. If you have 100 employees or less and want a plan that is straightforward and virtually effortless, the lesser known simple IRA plan fits the bill. Compared to a 401(k), the simple IRA is an easy-to-administer plan that provides the same underlying savings features of the 401(k) plan but with a streamlined design that reduces the amount of administrative efforts with no annual compliance testing or 5500 filing.
Here's a quick comparison chart highlighting the differences:
| ||Simple IRA ||401(k)|
|Eligible employer||Employers, who on any day during the preceding year have 100 or fewer employees earning $5,000 or more in compensation. No other plans can be maintained at same time ||Generally, any business can open a 401(k) plan|
Oct. 1 of current year, can be later if business was established after Oct 1
Plan year must be Jan. 1 – Dec. 31
|Depends on the type of plan selected but generally can be started at any time during the year with the exception of Safe Harbor match plans that must be started by Oct. 1|
|Eligible Employees||Employees who receive $5,000 in compensation in any two preceding years and are expected to receive $5,000 in current year are eligible. ||May be less but cannot exclude those who exceed age 21, have one year of service and 1,000 hours of service per year. |
|Employee Deferral Limits||Employees can defer up to $13,500 in 2020 or 100% of compensation, whichever is less; those over age 50 can make an additional $3,000 catch-up contribution ||Employees can defer up to $19,500 in 2020; those over age 50 can make an additional $6,500 catch-up contribution|
Employers must elect an employer formula, either a matching contribution on a dollar for dollar basis up to 3% or a nonelective contribution of 2% of the employees compensation up to annual limit of $285,000 for 2020
No Profit sharing allowed
Many options available from a safe harbor plan match, dollar for dollar matching to non-elective contribution.
Profit sharing is allowed
|Testing||No testing ||Subject to ADP, ACP and top-heavy testing |
|Vesting ||100% immediate vesting||Several vesting schedules are allowed depending on the plan type |
|Loans||No||Are an allowable option |
Annual Filings /Reporting
No 5500 filing is required
An annual participation notice is due to your plan participants at least 60 days in advance of the new plan year of Jan. 1
5500 is required and a Plan bond is required
Annual Plan Audit is required if more than 100 employees.
Annual notices required for some plan types
Our Big “I" IRA program was recently revamped and has partnered with a great new administrative service provider, iraLogix, to provide state-of-the-art administration along with low-cost investments from a variety of fund families, including the ever-popular Prudential Stable Value Fund.
The Big “I" Retirement and Employee Benefits programs also offer a great 401(k) plan option—the BIG I MEP 401k Plan—as well as group benefits such as life, short- and long-term disability, dental and vision.
Our programs are designed to meet the needs of Big “I" members with maximum flexibility at a competitive cost. To learn more, contact Christine Muñoz.