Comparison | SIMPLE IRA vs 401(k) Plan

Updated by Richard Phillips, EA, AIFA, CPC, CPFA, QPA, QKA

SEPs (Simplified Employee Pension) and SIMPLE-IRA arrangements are IRA accounts established by an employer for the benefit of their employees. 401(k) plans, on the other hand, are qualified retirement plans under Internal Revenue Code Section 401(k), hence the name 401(k). These plans are also established for the benefit of the adopting employer's employees.

Depending on an adopting employer's objective, either arrangement may be appropriate. Below is a summary comparison of the two.

SEP and SIMPLE IRA

§401(k) Plan

Eligibility

  • Must include all employees who have earned at least $5,000 in compensation during any 2 preceding years, and is reasonably expected to earn at least $5,000 in compensation in the current year.
  • Related employer issues. When a controll group (CG) or affiliated service group (ASG) is applicable, all employees of the CG or ASC must be included in the SIMPLE IRA.

Eligibility

  • Age 21 (may restrict participation to a maximum age of 21)
  • Year of Service (may require that all employees who have satisfied the age requirement work at least 1,000 hours (max) during an eligibility computation period (typically 1 year)
  • Excluded employees. As permitted under IRC §410(b), otherwise eligible employees may be excluded on the basis of a reasonable business classification.
  • Related employer issues. Employees of a related employer may be excluded by design, however, the plan is subject to the minimum coverage requirements of IRC §410(b).

Non-discrimination Testing

  • SEP | Limted to two testing methodolgies
    • Pro-rata
    • Permitted Disparity
  • SIMPLE IRA (not applicable)

Non-discrimination Testing

  • 401(k) | Permissible methods
    • Pro-rata
    • Permitted Disparity
    • Rate group testing
    • Cross-testing

--> Nondiscrimination allows for custom plan design to achieve specific business objectives of the Adopting Employer.

Contribution Limits (2023)

  • Employee: $15,500
  • Catch-up Contribution: $3,500
  • Employer: uniform allocation formula

Contribution Limits (2023)

  • Employee: $22,500
  • Catch-up Contribution: $7,500
  • Employer: non-uniform allocation formulas permissible, subject to IRC §401(a)(4)

Administrative Expenses

  • Employer: generally none
  • Employee: typical investment fees apply

Administrative Expenses

  • Employer: wide range, depending on plan design, provider and services selected
  • Employee: typical investments apply, plus certain recordkeeping and custodial fees

Governmental Reporting

  • None

Governmental Reporting

  • Stand-alone Plan: IRS Form 5500
  • Pooled Employer Plan (PEP): No individual plan reporting requirement

Protection from Creditors

  • None

Protection from Creditors

  • Federal law protects plan assets from creditors if the plan is covered by Title I of ERISA (Employee Retirement Income Act of 1974)

Availability to Funds

  • Loans: No
  • Hardships: No

Availability to Funds

  • Loans: Yes
  • Hardships: Yes

Vesting

  • All employer contributions are 100% immediately vested.

Vesting

  • Employer contributions, including certain safe-harbor contributions may be subjected to a vesting schedule.

Allocation Requirements

  • Not permitted

Allocation Requirements

  • May require employment on the last day of the plan year to receive the employer allocation
  • May require 1,000 hours of service to receive the employer allocation
Disclaimer
The above information is intended for summary reference only and is not expected to encapsulate the rules and regulations that may be applicable to all plans under the Internal Revenue Code, or plans subject to ERISA (The Employee Retirement Income Security Act of 1974).

How did we do?