2023 Plan Comparison: SIMPLE IRA provisions versus Traditional and Safe Harbor 401(k) Plans
If you're considering starting a new retirement program for your company, you may be considering a SIMPLE IRA as a possible solution.
We've broken down some of the features that differ between a SIMPLE IRA and 2 types of 401(k) plans - a Safe Harbor 401(k) and a Traditional 401(k).
Depending upon your needs, one option may be favorable over the others.
**UPDATE: The SECURE Act will allow sponsors of SIMPLE IRAs to start a new 401(k) Safe Harbor Plan in 2024 mid-year. Learn more on our SECURE 2.0 Resources page.**
Comparison
| Features | SIMPLE IRA | Safe Harbor 401(k) | Traditional 401(k) |
| Advantages | Salary reduction plan with little administrative paperwork and reduced administrative cost. No 5500 filing or non-discrimination testing. | Salary reduction plan with no non-discrimination testing requirements. | Salary reduction plan with flexible employer contribution and vesting schedule. |
| Disadvantages | Salary deferral limits are lower than 401(k)'s; employer contribution are required; employer contributions are 100% vested immediately. May not be combined with any other qualified plan or non-qualified plan utilizing a Rabbi Trust. | Safe Harbor Plans require that the Employer make a contribution - either a 3% Non-Elective or a 4% Match. Safe Harbor employer contribution 100% vested immediately. Annual Notice to participants required. | Non-Discrimination testing standards must be met. Highly compensated employee contributions limited by non-highly compensated employee participation. |
| Employers Who Can Provide This Option | Any employer with 100 or fewer employees that does not currently maintain another retirement plan. | Any employer. | Any employer. |
| Employer’s Responsibilities | Set up plan, for example, by completing IRS Form 5304-SIMPLE or IRS Form 5305-SIMPLE. | Set-up plan using a plan document and provide Safe Harbor Notice to participants annually. Form 5500 required each year. Safe Harbor Non-Elective or Match must be made annually. Uniglobal prepares documents. | Set-up plan using a plan document. Form 5500 required each year. Non-discrimination testing required annually. Uniglobal completes documents and testing. |
| Employee Coverage Requirements | Must be offered to all employees who have earned at least $5,000 in any prior 2 years, and are reasonably expected to earn at least $5,000 in the current year. | Eligibility requirements may or may not be imposed, employer option. Statutory requirements are: Age 21, Employed for 12 months, and have performed 1000 hours of service in the 12 month period. Entry options are Immediate, Monthly, Quarterly, or Semi-Annually. | Eligibility requirements may or may not be imposed, employer option. Statutory requirements are: Age 21, Employed for 12 months, and have performed 1000 hours of service in the 12 month period. Entry options are Immediate, Monthly, Quarterly, or Semi-Annually. |
| Maximum Annual Contribution (EE) | Employee : 2023: $15,500 for employees under age 50, $19,000 for employees age 50 or older. | Employee : 2023: $22,500 or $30,000 if over age 50. | Employee : 2023: $22,500 for employees under age 50, $30,000 for employees age 50 or over. Testing may cause refunds to Highly Compensated Employees. |
| Maximum Annual Contribution (ER) | Employer: Employer must make a mandatory contribution of: Either Match employee contributions 100% of first 3% of compensation (can be reduced to as low as 1% in any 2 out of 5 yrs.) or contribute a non-elective contribution equal to 2% of each eligible employee’s compensation. | Employer : Employer must make either a 4% Match or a 3% Non-Elective contribution. Employer contribution is not discretionary. Combined employee and employer contribution can not exceed $66,000 for 2023 ($73,500 for employees age 50 or over). | Employer : Not required (unless plan is top-heavy). Employer may make a Match or a Non-Elective contribution. Employer contribution is discretionary and can change annually. Combined employee and employer contribution can not exceed $66,000 for 2023 ($73,500 for employees age 50 or over). |
| Contribution Testing | None. | Non-Discrimination testing standards are deemed to be satisfied. Top Heavy testing may be required in some circumstances. | Non-Discrimination testing standards must be met on employee salary deferrals and employer matching contributions. Top Heavy testing required. |
| Contributor’s Options | Employee can decide how much to contribute. Employer must make 3% matching contributions or contribute 2% of each employee’s salary up to the set maximum. | Employee can decide how much to contribute. Employer contribution required. | Employee can decide how much to contribute. Employer has no required contribution (unless plan is top-heavy). |
| Vesting | Vesting schedule may not be imposed. Employer contributions are vested 100% immediately. | Vesting schedule may not be imposed on the Safe Harbor Matching or Non-Elective contribution. Any additional employer non-Safe Harbor contributions may be subject to a vesting schedule. | Vesting schedule may be imposed. Typical vesting schedules include: 6-year graded: 0% vested in year 1, then 20% vesting accrued each year until employee is 100% vested in year 6; 3-year cliff: 0% vested in years 1 and 2, then 100% vested in year 3; 25% per year: 25% vesting from year 1, accruing additional 25% each year thereafter. |
| Withdrawals & Payments | Withdrawals at any time. If employee is under age 59 ½, may be subject to a 25% penalty if taken within the first 2 years of participation and a possible 10% penalty if taken afterwards. | Upon termination of employment, retirement, death, and permanent disability are required. Employer has the option to allow distributions while employee is still employed. | Upon termination of employment, retirement, death, and permanent disability are required. Employer has the option to allow distributions while employee is still employed. |
| Rollover Options | May be rolled-over into IRA, 403(b), 401(k), or SIMPLE 401(k). May receive rollovers only from another SIMPLE IRA. | May be rolled-over into IRA, 403(b), 401(k), or SIMPLE 401(k). May also receive rollovers from IRA, 403(b), 401(k), and SIMPLE 401(k). | May be rolled-over into IRA, 403(b), 401(k), or SIMPLE 401(k). May also receive rollovers from IRA, 403(b), 401(k), and SIMPLE 401(k). |
| Loans permitted | No. | Yes - if employer elects. | Yes - if employer elects. |
A SIMPLE IRA may be the best stepping stone for your organization before taking the leap into a 401(k). However, if you require flexibility and more control of functionality, offerings, and services, the 401(k) is going to be your best option.
Last Update: December 6, 2023.