Retirement plan options for small business abound in the market today, but choosing the right one for a company might present a challenge. SIMPLE IRAs offer quick, expedient solutions to a small business as well as tax savings and reduced administrative costs. A 401k plan, however, might be more flexible for a business, despite the likelihood of higher administrative burdens. A 401k will allow an employee to put more into retirement each year and can easily grow with a business. The challenge, then, is deciding which plan will most likely produce the best results for employees and for the business.
Understanding a SIMPLE IRA
The SIMPLE IRA was designed as a retirement instrument specifically for businesses with fewer than 100 employees. SIMPLE has the advantage of a very low administrative cost. It is not subject to annual discrimination tests and employees cannot take out loans against it. Employers have the option of contributing a non-voluntary flat 2 percent for everyone in the company making over $5,000 annually or matching the first 3 percent put in by all employees. In this plan, an individual retirement account is set up for each employee and may be managed by that employee directly.
The Advantages of a 401k Retirement Plan
Unlike a SIMPLE IRA, the employer is not required to make contributions on behalf of an employee to the plan, and there is no limit to how many employees participate in the plan. While this may be more flexible for an employer, 401ks also come with a host of regulatory concerns. There are multiple tests that determine whether a 401k favors the most highly compensated employees, require employers to keep abreast of the gap between the most and least compensated employees, and may result in the employer piling in contributions to the plan to keep it equitable. These tests must be done on an annual basis.
Contribution Limits for Employees
Each plan differs further in how much compensation can be deferred on an annual basis. In the SIMPLE plan, an individual may contribute a maximum of $11,500 annually to such an IRA, with a "catch up" provision for those over 50 eligible to add another $2,500, for a total of $14,000 in tax-deferred retirement compensation. The 401k differs from a SIMPLE IRA plan in that the contribution level for deferred compensation is considerably higher. As of the time of publication, it was $17,000 of gross income, with participants over 50 allowed to add up to $5,500 as "catch-up" compensation, raising the contribution limit to $22,500 each year.
Perhaps the biggest difference between the two investment products is that with a 401k, the employer can opt to have many different investment providers for employees to choose from; the SIMPLE IRA can have only one provider servicing the entire company. In addition, the SIMPLE is a stand-alone program, meaning an employer utilizing SIMPLE may not have another type of retirement or profit-sharing program. A 401k plan does not have this limitation.
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