SIMPLE 401(k) vs 401(k)
Q. I own a small business and have 5 employees. I am looking to expand to company and need to offer some kind of retirement plan for my employees. 401(k) plans are really expensive and I don’t know much about SIMPLE plans. What do I choose?
A. This is a very important question for small business owners to think about. When you are ready to start offering benefits to your employees, some types are better suited for larger employers and some are specifically designed for smaller employers. The biggest difference between these types of plans is the testing requirement. In traditional 401(k) plans, employers need to ensure that the plans do not become “top heavy”. That is, key or highly compensated employees are taking advantage of the plan more than regular employees. If a 401(k) plan becomes top heavy, the plan risks losing it’s tax benefits. In a smaller business, an employer may wish to take full advantage of the retirement contributions on behalf of him or herself while employees may not want to or be able to. By removing the testing requirement, you are providing the plan without the risks.
Limits on the SIMPLE plans are a bit lower ($11,500-Simple vs $16,500-traditional for 2009). There are also limits to the amount that an employer can contribute to an employee’s account (3% of employee compensation-Simple vs 25%-traditional). If your employee population reaches 100, that employer is no longer eligible for the SIMPLE type plans.
It is a great idea to offer a retirement savings plan to your employees. As an employer, you can choose to match or not match the contributions which makes the plan that much more valuable. It is a great way to attract and retain the best talent.
