A Brief Overview About Simple 401 k Plans

A simple 401 k doesn't have to face the discrimination tests that come with traditional 401 k plans. That can mean lower annual administrative costs for a business. It also means that the salary deferral contributions of an owner and key employees are not limited by the amount of other employee deferrals.

These 401 k's have simple contribution formulas. To learn more about 401 k compliance assistance, browse the internet. An employer actually has two options when it comes to simple 401 k contributions:

Option 1 – Fixed Contributions. 

Option 2 – Matching Contributions. 

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There is no vesting schedule, any employer contribution to a simple 401 k is fully vested as soon as it is made. This is a big difference from a standard 401 k. An employee doesn't have to spend years waiting for complete control over 100% of his or her retirement plan assets. Loans and withdrawals are permitted and employees may take loans and in-service withdrawals from a simple 401 k.

If you establish a simple 401 k, your company cannot have any other kind of qualified retirement plan. You also can't elect to suspend employer contributions, a choice that you can make with a traditional 401 k if desired. Should your business grow to where your payroll exceeds 100 employees, the IRS gives you a two-year "grace period" during which contributions to the plan may continue to be made. Lastly, remember that since the simple 401 k is a 401 k plan, your business needs to file a Form 5500 each year with the IRS.