The Simple 401k for Small Businesses

The Simple 401(k) plan (or Savings Incentive Match Plan for Employees) is one of the 401(k) plans offered by small businesses to their workers. This is a cross between a Simple IRA and a normal 401(k) plan. It is supposed to be a cost-effective alternative to other 401(k) plans.

Eligibility Requirements/Conditions for Establishing the Simple 401(k) Plan


The Simple 401(k) plan is available to all small business employers who are eligible to establish the traditional 401(k) plan. Whether your business is a sole proprietorship, partnership or corporation, you can adopt the Simple 401(k) if you meet or comply with these requirements:

  • You employ a maximum of 100 employees.
  • You cannot establish or do not have other retirement plans.
  • You have to file form 5500 annually.
  • You must establish this Simple 401(k) plan between January 1 and October 1 unless your business was started after October 1, in which case you should establish it as early as possible.
  • You should comply with the annual notice requirements.
  • A non-elective contribution of a flat 2 percent compensation is a must even if the employee does not contribute.


  • You must be 21 years old and should have completed a minimum of one year of service in the company to be able to participate in the Simple 401(k) plan.
  • You must have earned at least $5,000 from the company in the year before signing up for the plan.

Benefits of the Simple 401(k) Plan:

  • Apart from the amount you are contributing to match the workers’ contributions, costs are quite low compared to those of other retirement plans.
  • The Simple 401(k) plan is quite flexible. It can be tailored to the investment goals and needs of the company as well as the workers.
  • You can fund the plan totally with only the contributions from the employees and your contributions, whose tax-deductible levels are as flexible as the current law allows.
  • Workers' loyalty is increased because you are helping them save for their retirement, and so you may be able to save on recruitment costs.

Advantages of the Simple 401(k) Plans over Other Retirement Plans:

  • The non-discrimination and top-heavy testing for regulatory compliance is not required for the Simple 401(k) plan. So you are saving on the administration costs of this testing.
  • Whether you are the owner or the worker, loans are allowed, which can be a great benefit in needy times.

For employees:

  • They can choose the amount they want to invest and the investments that will meet their retirement plan, and they are at liberty to reallocate the funds anytime to suit their needs.
  • The tax burden is lower, as payroll contributions are pre-tax and post retirement withdrawals attract less tax.


  • The contributions to the Simple 401(k) plan are 100 percent immediately vested. So the employee can withdraw his/her entire account balance any time.
  • Contributions are lower.
  • Only one plan can be established.

Including a Simple 401(k) retirement plan may be the best option a small business owner makes as a retirement plan for the workers in his or her company.

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