What is a SIMPLE 401(k) Plan?

The SIMPLE 401(k) plan is a cross between a SIMPLE IRA and a Traditional 401(k) plan. Small businesses with less than 100 employees and no other retirement plans are eligible, and can offer the plan to all employees 21 years and older that were employed for a calendar year. Following is an overview of some of the features and benefits of the SIMPLE 401(k) plan as compared to a Traditional 401(k) plan.

Advantages of a SIMPLE 401(k) Plan

Following are advantages of SIMPLE 401(k) Plans:

• There is no testing – An employer that adopts a traditional 401(k) plan may be required to perform certain non-discrimination and top-heavy testing to ensure that the plan operates in compliance with regulatory requirements. SIMPLE 401(k) plans, on the other hand, do not require these tests which can be very appealing to a small business owner who likes the features of the 401(k), but can't afford the administration costs of testing.

• Loans are allowed –This is an attractive feature of a qualified plan because employees and business owners usually like the idea of being able to borrow their own funds and make loan and interest payments to their own accounts. The loan feature can be made available in both SIMPLE and traditional 401(k) plans.

Disadvantages of SIMPLE 401(k) Plans

Following are disadvantages of SIMPLE 401(k) Plans:

• Immediate vesting of contributions - With a traditional 401(k), employer contributions can be subject to a vesting schedule, which may help to reduce high employee turnover. But contributions to a SIMPLE 401(k) are immediately 100% vested, which means that an employee who meets the requirements to receive distributions from the plan may withdraw his or her entire account balance at any time.

• Contribution limits are lower - Contribution limits for a SIMPLE 401(k) plan are lower than the limits for a Traditional 401(k) plan.

• One Plan Limitation – An employer who establishes a SIMPLE 401(k) plan cannot maintain any other plan for employees who are eligible to participate in the SIMPLE 401(k) plan. By contrast, provided certain requirements are met, an employer who establishes a traditional 401(k) plan may choose to establish a SEP, profit-sharing or other defined-contribution plan, maintain both plans concurrently and allow eligible employees to participate in both plans.

A SIMPLE 401(k) plan is a cost-effective alternative to traditional 401(k) plan. They don’t require discrimination testing, and administration is, well, simple.

Hilary Basile is a writer for MyGuidesUSA.com. At MyGuidesUSA.com (http://www.myguidesusa.com), you will find valuable tips and resources for handling life’s major events. Whether you’re planning a wedding, buying your first home, anxiously awaiting the birth of a child, contending with a divorce, searching for a new job, or planning for your retirement, you’ll find answers to your questions at MyGuidesUSA.com. Find information on 401(k) plans, IRAs, pensions, social security, and other retirement tips and resources at: http://www.myguidesusa.com/retirementplanning