SIMPLE IRAs To 401(k) Plans

By Anthony L. Scialabba IV, Esq., QKA

 

What Are SIMPLE IRAs And 401(k) Plans?

 

A 401(k) plan and a SIMPLE IRA are retirement savings plans offered by employers that permit eligible employees to choose to have their employer automatically contribute a designated amount of the employee’s salary each year. A SIMPLE IRA is designed for small employers not presently sponsoring a retirement plan, whereas a 401(k) plan can be designed for small or large employers that either do or do not currently sponsor a retirement plan.

 

Why Should You Consider A Transition?

 

There are a number of reasons why an employer may elect to utilize a 401(k) plan rather than a SIMPLE IRA. If an employer’s intention is to assist employees by lowering taxable income and maximizing savings for their retirement, a 401(k) should be implemented. For instance:

 

• In 2022, the maximum elective deferral limit for a SIMPLE IRA is $14,000. In comparison, with a 401(k) plan that limit is $20,500.

 

• In 2022, the maximum “catch-up” contribution limit regarding a SIMPLE IRA is $3,000. Whereas in concern to a 401(k) plan, that limit is $6,500.

 

With regard to a SIMPLE IRA, vesting schedules are not permissible. Under a 401(k) plan, the employer has several options of vesting schedules to implement. Therefore, a 401(k) plan can potentially be more useful if the employer wants to incentivize employees to remain employed (In doing so, a 401(k) plan’s vesting schedule can assist an employer in retaining talent.).

 

SIMPLE IRAs do not permit loans or Roth contributions. 401(k) plans enable loans, Roth contributions, and other features not authorized in SIMPLE IRAs. If an employee wants to pursue a number of retirement plan tools, a 401(k) plan provides greater flexibility.

 

In a SIMPLE IRA, employer contributions are required. In a 401(k) plan, employers have the choice of whether or not to provide employer contributions. Thus, a 401(k) grants more control to the employer in this regard.

 

When Must The Termination Occur By?

 

A SIMPLE IRA may be terminated if the employer gives notice to the employees within a reasonable time prior to November 2. If such notice is supplied, the termination of the SIMPLE IRA will become effective the following January 1. On that January 1, if the employer completes certain requirements, a 401(k) plan can be created.

 

If you have any questions or comments in connection with the establishment of a 401(k) plan, please call 856-396-0499 or email clientservices@retirewelltpa.com.