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SIMPLE 401 (k) Plans

The SIMPLE 401(k) plan is a cross between a SIMPLE IRA and traditional 401(k) plan and offers some features of both plans If you had 100 or fewer employees who earned $5,000 or more in compensation during the preceding year, you may be able to set up a SIMPLE 401(k) plan. You can adopt a SIMPLE plan as part of a 401(k) plan if you meet the 100-employee limit.

A SIMPLE 401(k) plan is a qualified retirement plan and generally must satisfy the rules for qualified plans. However, a SIMPLE 401(k) plan is not subject to the nondiscrimination and top-heavy rules associated with qualified plans if certain conditions are met. The notification requirement that applies to SIMPLE IRA plan also applies to SIMPLE 401(k) plans. You may be able to claim a tax credit for part of the ordinary and necessary cost of starting a SIMPLE 401(k) plan.

Distributions from 401(k) plans:

Generally, distributions from a 401(k) plan are subject to taxes in the year they are distributed.

Early distributions (before age 59 1/2) are generally subject to a addition tax. The additional tax is 10% of the amount of the early distribution.

There are a number of exceptions where this additional tax will not apply even when the distribution is receive before reaching age 59 1/2.

For example:

  • Distributions made due to the employee having a qualifying disability.
  • Distributions made to an employee after separation from service if the separation occurred during or after the calendar year in which the employee reached age 55.
  • Distributions made because of an IRS levy on the plan.
  • Distributions made as part of a series of...
    • substantially equal periodic payments
    • beginning after separation from service and
    • made at least annually for the life (or life expectancy) of the employee or the joint lives (or life expectancies) of the employee and his or her designated beneficiary.
    • Under this exception, the payments (except in the case of death or disability) must continue at least 5 years or until the employee reaches age 59 1/2, whichever is longer.

After the SIMPLE Plan is Set Up

Once you set up a SIMPLE plan you must continue to meet the 100-employee limit each year you maintain the plan.

Grace period:

If you maintain the SIMPLE plan for at least one (1) year and in a later year, you don't meet the 100-employee limit, you're given a two-year grace period following the calendar year for which you last met it.

What is an Eligible Employee?

An eligible employee is one who:

  • Received at least $5,000 in compensation during any 2 years preceding the current calendar year and
  • Is reasonably expected to receive at least $5,000 during the current calendar year.

The term employee includes a self-employed individual who received earned income.

Using less restrictive eligibility requirements:

  • You can use less restrictive eligibility requirements but not more restrictive ones.
    • For example, you can reduce the prior year compensation requirement, the current year compensation requirements, or both.
  • You cannot impose any other conditions for participating in a SIMPLE IRA plan.

Are there employees who I may exclude from my SIMPLE IRA plan?

You may choose to exclude employees who are:

  • covered by a collective bargaining agreement, if retirement benefits were the subject of good faith bargaining between you and the employee representatives
  • covered by a collective bargaining agreement between you and air pilots represented in accordance with Title II of the Railway Labor Act; and
  • nonresident aliens and who received no U.S. source earned income.
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