401(k) vs. SIMPLE IRA Retirement Plans: What’s the Difference?

Do you offer your employees a retirement plan? 

Providing a retirement plan in your benefits package can help you attract top talent, increase employee retention, and put your business on the path to success.  But selecting the right retirement plan for your business and its employees is a complex decision. 

When evaluating different plan options, ask yourself: 

• What type of workers do you employ? (For example: full or part-time, older or younger than 21, new employees or long-term employees, etc.) 
• Do you want to offer benefits to all employees or only certain groups?  
• What benefits do you want to offer? 
• How much can you budget for benefits administration costs?  

Once you answer these questions, you can begin comparing plan options – such as 401(k) and SIMPLE IRA plans – to determine which is best for you, your business and your employees. 

What’s the Difference Between a 401(k) and SIMPLE IRA Plan? 

Both 401(k) and Savings Incentive Match Plan for Employees (SIMPLE) IRA plans help your employees save for retirement by allowing them to contribute to a savings account through salary deferral. However, the two plans have far more differences than similarities. Some differences between a 401(k) and SIMPLE IRA include: 

Employer Eligibility  

While any business can offer a 401(k) plan, only those with 100 or fewer eligible employees may offer a SIMPLE IRA. 

Employee Eligibility 

As an employer, you may be able to set eligibility requirements less restrictive than the points below. However, the following rules are most typical. 

To be eligible to offer a SIMPLE IRA plan, your employees may be required to:  

• Have been compensated at least $5,000 in any prior two years and  
• Be reasonably expected to earn at least $5,000 in the current year 

To be eligible to offer a 401(k) plan, your employees may:  

• Be at least 21 years old and  
• Have worked at least 1,000 hours in the previous year  

Employer Contribution Rules 

Employer contributions to employee 401(k) accounts are fully optional. Additionally, if you do choose to contribute to your employees’ 401(k) accounts, you can implement a minimum amount of time an employee needs to work for your business before you begin contributing. Alternatively, SIMPLE IRAs require employers to make either a matching contribution of up to 3% of an employee’s pay or a 2% non-elective contribution based on employee’s pay immediately upon hiring.  

Contribution Limits 

SIMPLE IRA plans adhere to the standard employee contribution limit of $15,500 per year (or $19,000 per year for those over 50). However, 401(k) plans have a higher limit: $22,500 annually (or $30,000 for those over 50). 

Administrative Responsibilities  

SIMPLE IRAs do not have any annual tax filing requirements and are typically easier to set up and administer. Administratively, 401(K) plans may take a bit more effort due to annual compliance testing and required annual tax reporting.  

Investment Options 

SIMPLE IRA plans allow account holders to invest in a broad range of options, including individual stocks, bonds, and mutual funds. The investment options available with a 401(k) plan are typically at the plan sponsors’ discretion. 

Early Withdrawal and Borrowing Rules  

Employees face significant early withdrawal penalties with both SIMPLE IRA and 401(k) plans if they want to use funds before retirement age. Some 401(k) plans may allow employees to borrow from their retirement account, while SIMPLE IRA plans never permit this. 

Tax Credits 

Thanks to the SECURE Acts of 2019 and 2022, employers starting new 401(k) retirement plans may be eligible for up to $16,500 in tax credits over three years. Eligible businesses that choose to give matching or profit-sharing contributions may qualify for an additional tax credit of up to $1,000 per employee.  

Businesses that provide employees with a SIMPLE IRA plan may be able to claim a tax credit of up to $5,000.  

401(k) vs Simple IRA: How to Pick the Right Plan for Your Business  

You’ll need to weigh the pros and cons of 401(k) and SIMPLE IRA plans against the unique needs of your business and employees to select the best plan. 

For example: 

• A 401(k) may be a better fit if you do not wish to match contributions or if you want to offer retirement benefits to a select group of employees, such as those who have a certain number of months or years with your business.  
• A SIMPLE IRA might be best if you only have a few employees or have a small budget for set up and administration costs.  

Remember the quality of your retirement package can have a significant effect on the satisfaction of your employees. If recruiting and retaining top talent is a priority, you may want to consider introducing an attractive retirement plan, such as a 401(k). Although a 401(k) can require additional setup costs, 401(k)s also have higher contribution limits and may allow employees to borrow funds before retirement age, so employees often prefer them.    

Sure401k®: Affordable 401(k) plans for small business owners 

SurePayroll, a Paychex company, can guide you in setting up a 401(k) built for you.  

Our competitively priced, quality 401(k) retirement plan can help you retain employees and improve satisfaction.  

The SurePayroll 401(k) plan offers: 

• Competitive and transparent fees - prices built for a small business budget 
• Flexibility – Choose from pre-selected plans available through Mesirow, our fiduciary partner; or create your own plan from 1,600 investment options  

• Ease of use – one platform and one trusted source for retirement and payroll 
• Plan administration support, so you can stay focused on your business 

Call 866-497-2028 to learn more about small business 401(k) plans today.