Until now, offering your employees a SIMPLE IRA or SEP plan might have offered strong value to your workforce, and to you as the small-business owner. However, if your company is growing or the nature of your workforce is changing, it might be time to put a 401(k) in place instead, for many reasons.
For one, a 401(k) is more flexible, with the ability to be amended as your business changes. And, its expanded options may be a better fit for your company’s evolving financial picture. Here are some detailed benefits that switching to a 401(k) plan can provide:
- Saves employers money due to eligibility conditions, employee group exclusion provisions, vesting time horizons
- Employer matches are tax deductible
- Plan sponsor can make fixed or discretionary matching contributions or profit-sharing contributions
- Higher contribution limits overall and higher limits for participant elective deferral contributions
- Participants can contribute to the 401(k), with the potential to increase retirement savings
- Tax-free access to funds as a loan in an emergency (with certain restrictions)
- Under the new SECURE Act, small businesses are eligible for a tax credit to offset the costs of starting a new 401(k) plan, with additional credits for plans with an auto-enrollment feature
- The distribution rules for 401(k) plans keep assets within the plan and protect them
SIMPLE, SEP and 401(k) comparisons
Here are some general comparison points between the three plans. Certain exclusions and other conditions may apply, depending on the plan design.
|
SIMPLE IRA |
SEP Plan |
401(k) Plan |
|
Vesting – 100% immediate for employee contributions |
Vesting – 100% immediate |
3-7 years for employer matching amount, depending on plan design (100% employee contributions) |
|
Who is eligible – employees who earn at least $5000 in any two preceding years and are expected to earn min. $5000 in current year |
Employee must be age 21, worked for employer at least 3 of the last 5 years, received at least $600 in compensation from employer during the year |
Age 21, 1000 hours of service to employer in 12 months. Other exclusions may be permitted, subject to non-discrimination testing |
|
Participant contributions – pre-tax salary reduction contributions Employer contributions – dollar-for-dollar match on deferrals up to 3% or non-elective 2% contribution of each eligible employee’s compensation. |
Participant contributions – none permitted Employer contributions – discretionary, uniform allocation to all eligible employees or by integrated formula |
Participant contributions – pre-tax elective deferrals, Roth deferrals or post-tax voluntary Employer contributions – fixed or discretionary employer match; also available profit sharing allocations |
|
Distributions – upon request |
Upon request |
Upon severance, death, disability, age 59-1/2, plan termination; in-service hardship withdrawal allowed, or at stated age or after fixed number of years. Loans may be permitted at any time. |
|
Income tax withholding on distributions – 0%-25% depending on whether the distribution is taken in cash, or rolled over to another eligible plan or IRA. |
0%-10% depending on whether the distribution is taken in cash, or rolled over to another eligible plan or IRA. |
0%-20% depending on whether the distribution is taken in cash, or rolled over to another eligible plan or IRA. |
If you’re thinking of changing your workplace retirement plan from a SIMPLE IRA or SEP to a 401(k) plan, INTAC’s plan advisors will review all the provisions, contribution limits, distribution taxation guidelines, and eligibility requirements with you. And, as a 401k plan designer and administrator, we’ll make sure all plan changes meet regulatory requirements for employer-sponsored plans, and manage the entire implementation process to change your plan. Contact us to arrange a consultation.