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SIMPLE IRAs vs 401(k) Safe Harbor Plans - 2023

SIMPLE IRAs |

SIMPLE IRAs vs 401(k) SAFE HARBOR PLANS:

WHAT ARE THE DIFFERENCES?

This outline compares a SIMPLE IRA with a safe-harbor 401(k) plan and is especially important for employers who must cover participants other than just the owners. 

Savings Incentive Match Plans for Employees (SIMPLEs) are frequently mentioned as a low cost alternative to 401(k) Safe Harbor Plans for providing employees the opportunity to save for retirement.  In particular, SIMPLE IRAs carry a lower administrative burden than 401(k) Safe Harbor Plans, due to simplified plan documents, and no annual compliance testing or 5500 government reporting requirements.  Given these factors, we are frequently asked whether a small business should even bother with a qualified plan, such as a 401(k) plan.  The purpose of this outline is to compare a SIMPLE IRA with a safe harbor 401(k) plan --- especially for employers who must cover participants other than just the owners.   

In order for an employer to be eligible to start a SIMPLE IRA plan, it must have no more than 100 employees who earned $5,000 or more during the preceding calendar year, and it must not make contributions to the SIMPLE plan if any of its employees are also receiving allocations in another qualified plan maintained by the employer, unless that plan is for collectively bargained employees. 

 

 

SIMPLE IRAs

401(k) Safe Harbor Plans

A  

Plan Year

May only be maintained on a calendar year.

May be calendar year or fiscal year.

B

Eligibility

Employees who earned at least $5,000 in any two calendar years preceding, and who are expected to earn $5,000 during the year for which the contribution is being made, must be included.

Can exclude employees who never worked at least 1,000 hours in a 12-month period and employees who are not at least age 21.

C

Maximum Employee Contribution

Employees may contribute up to the lesser of $15,500 or 100% of pay for 2023.

Employees may contribute up to the lesser of $22,500 or 100% of pay for 2023.

D

Catch-up Contributions

Participants who are 50 or above by the last day of the year may make additional contributions not exceeding $3,500 for 2023.

Participants who are 50 or above by the last day of the year may make additional contributions not exceeding $7,500 for 2023.

E

Employee Roth Contributions

Not permitted.

May be permitted by the plan.

F

Required Minimum Employer Contribution

The employer must provide an annual election notice to employees that describes the decision to contribute either:

    1. A dollar-for-dollar match on up to 3% of pay
      contributed by the employee* (with no cap on compensation); or
    2. A nonelective contribution of 2% of pay to all eligible participants regardless of any employee contributions, and based on pay of up to
      $330,000 for 2023.

 

The employer must provide an annual Safe Harbor Notice, which describes the commitment to contribute, as stated in the plan:

    1. A match at least as generous as 100% of the first 3% of pay contributed by the employee, plus 50% of the next 2% of pay contributed; or
    2. A non-matching contribution of 3%
      of pay for all participants.

Pay considered for contributions is limited to $330,000 for 2023.

G

Compensation Considered for Required Employer Contributions

When applicable, the nonelective contribution must be based on employee pay for the entire calendar year.

Plan may permit Safe Harbor Employer contributions to be based on employee pay for the entire plan year or, for new plan participants, only on pay earned after becoming eligible.

H

Other Employer Contributions

None permitted.  Also, there is no requirement to fund a Top Heavy Contribution.

Other employer contributions are permitted, including discretionary profit sharing and matching contributions; discretionary match is allowed and will not require ACP testing as long as allocation does not exceed 4% of pay and it is calculated using deferrals of no more than 6% of pay. 

The plan may be designed in such a way as to avoid requirement to fund a Top Heavy Contribution.

I

Vesting

All contributions are fully vested.

Must fully vest the safe harbor minimum contribution.  But all additional contributions can be subject to the plan’s vesting schedule.

J

Loans

Not permitted.

Permitted.

K

Distributions

Allowed at any time, subject to 10% early withdrawal penalty prior to age 59 ½ or 25% penalty if funds are withdrawn within 2 years of participation.

 

Plan may impose limitations on timing of withdrawals up to normal retirement age.  Limitations apply to in-service withdrawals of Safe Harbor amounts. 10% early withdrawal penalty applies.

L

Maximum total annual contribution per person

Determined as in (C), (D) and (F) above.

Lesser of 100% of pay or $66,000 in 2023.

M

Maximum Employer Deduction Allowed (i.e. excluding the participant’s elective deferral)

Determined as in (F) above.

The total deduction of employer contributions (match plus profit sharing) for all participants combined must not exceed 25% of all combined participant salaries. 

 *The match must be 3% in at least 3 out of every 5 years, and may not be lower than 1%. 

Because SIMPLE IRAs must be operated on a calendar year basis, and because they must provide an annual notice to plan participants before the required 60-day election period at the end of the year, the time to set up a SIMPLE IRA plan is between January 1 and October 1.  Should the employer need to terminate an existing retirement plan in order to establish a SIMPLE plan, thought should be given to contribution requirements and the timing of that termination, and the effect that will have on the start date for the new plan. 

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