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One of the decisions that business owners make is what kind of retirement plan to set up for their self and their employees, and the two most common choices are between SIMPLE IRAs and 401(k) plans. Which one makes the most sense for you?
The decision may appear easy, when you examine the highlighted differences in the table below:
| Features |
SIMPLE IRA |
401(k) |
| Pre-tax elective contributions |
Allowed |
Allowed |
| Deferral limits under age 50 |
$11,500 |
$17,000 |
| Deferral limits age 50 and up |
$14,000 |
$22,500 |
| Employer contributions |
Mandatory |
Optional |
But there are some hidden traps in making the wrong choice. For example, if you choose a SIMPLE IRA and later decide you want the larger deferral limit or loan feature of a 401(k) plan, this begs the following question that the IRS has answered for us:
Can I amend or terminate my SIMPLE IRA plan in the middle of the year?
No. You can’t amend or terminate your SIMPLE IRA plan mid-year. A SIMPLE IRA plan must be operated for the entire calendar year (or the remainder of the calendar year if started after January 1). Additionally, once you have given employees the annual notice describing the plan features for the coming year, you can’t change any of those features during the year.
Example: On November 18, 2011, Acme Company decided it would like to change its SIMPLE IRA plan matching contributions from 3% to 1%. Acme’s SIMPLE IRA plan notice to employees (given on November 2, 2011) stated the match would be 3% for 2012. Acme must contribute 3% for 2012. The earliest effective date for Acme’s change in matching contributions would be January 1, 2013. Acme must notify its employees during 2012 that it will reduce the matching contribution to 1% in 2013.
If your SIMPLE IRA plan no longer fits your business needs and you’d like to terminate it, notify the SIMPLE IRA plan financial institution that you won’t be contributing the next calendar year. You must also notify your employees by November 2 that you will discontinue the SIMPLE IRA plan effective the first day of the next calendar year. You don’t need to notify the IRS that you have terminated the SIMPLE IRA plan.
Example: Acme Company decided on November 18, 2011, to terminate its SIMPLE IRA plan as soon as possible. The earliest effective date for the termination would be January 1, 2013. Acme must notify its employees during 2012 that it won’t sponsor a SIMPLE IRA plan for 2013.
Miss a deadline, and you're stuck with a SIMPLE IRA for another plan year!
There are other features one should consider before making the decision:
| Features |
SIMPLE IRA |
401(k) |
| Roth Contributions |
Not Allowed |
Allowed |
| Loans |
Not Allowed |
Allowed |
| Vesting Schedule |
Not Allowed |
Allowed |
| Deadline to establish |
October 1 |
December 31 |
| Notice of Changes or Plan Termination |
60 Days prior to next plan year |
Generally, anytime |
In our experience, there's one big difference between SIMPLE IRA and 401(k) plans that every business owner should seriously consider when making their decision:
| Emergencies and Opportunities - What if you or an employee needs cash right away? |
| SIMPLE IRA |
401(k) Plan |
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No Loans allowed! Penalty tax on pre 59½ withdrawals is 25%, plus income tax.
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Loans allowed! The maximum amount that the plan can permit as a loan is (1) the greater of $10,000 or 50% of your vested account balance, or (2) $50,000, whichever is less.
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Want a FREE look at a new plan for your business? Or a FREE review of your existing plan to see if we can increase your tax advantages and features, or reduce your costs?
Call today (800) 680-5596 or send us an email.
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Pension Plans 
