Small business 401k plans
For a complete list of available retirement plans and annual plan limits, reference our employee retirement plan chart.
What is a simple 401k plan?
In 1997, the SIMPLE 401k was established so that small businesses could have an effective, cost-efficient way to offer retirement benefits to their employees. This type of plan is targeted at businesses of 100 employees or less that offer no other retirement savings plan.
Employees who are 21 years or older and have been employed for at least a year can be eligible to participate in this plan.
Employers have two options for contribution. The first contribution method encourages employee participation by requiring the employer to match all employee contributions up to 3% of their salaries, with a $6,000 limit.
The second option is a fixed contribution plan. In this case, employers pay a flat 2% of a worker's salary. This contribution is required for all participating employees, regardless of whether the employees contribute on their own.
SIMPLE Plans vs. Traditional Plans
Since the SIMPLE 401k is not subject to the stringent discrimination tests that apply to traditional 401k plans, the annual costs of administering the plan tend to be substantially reduced.
Lower employee contribution limits
SIMPLE 401k plans have lower maximum employee contribution limits than traditional 401k plans. For instance, the maximum that an employee can contribute to a SIMPLE 401k for 1999 is $6,000; the maximum employee contribution on a 401k is $10,000.
Mandatory employer contributions
SIMPLE 401k plans require employers to make contributions to their employees' accounts. Employer contributions are optional for traditional 401k plans.
Automatic vesting of employer contributions
Employer contributions made to SIMPLE 401k plans are automatically fully vested. Traditional 401k plans, in comparison, provide employers the option of creating vesting schedules, whereby employer contributions become fully vested over a period of years.