A small employer may find that converting its 401(k) plan into a “SIMPLE” 401(k) plan is preferable to adopting a traditional safe harbor 401(k) plan. What is a SIMPLE 401(k) plan? It is a 401(k) plan under which the employer makes either (i) a nonelective contribution to the plan equal to 2% of compensation for each employee who was eligible to defer under the plan or (ii) a matching contribution equal to 100% of each employee’s deferrals up to 3% of compensation. Such a plan is not necessarily as simple or attractive as it may sound, however, because of complexities and limits such as the following:
- SIMPLE 401(k) plans are available only to employers with 100 or fewer employees who received at least $5,000 in compensation for the preceding year and that do not maintain another employer-sponsored retirement plan. If an employer adopts a SIMPLE 401(k) plan when it is small and then grows into being a large employer, the rules give the employer a 2-year transition period during which the employer will still be treated as eligible to have the plan.
- Employee elective deferrals are limited to $13, 000 per year for 2019, which is significantly less than the limit on deferrals under a safe harbor 401(k) plan, which is $19,000 for 2019. Please note that these deferral amounts can and do change annually.
- Employee age 50 catch-up deferrals in a SIMPLE 401(k) plan are limited to $3,000 for 2019, which is significantly less than the limit on age 50 catch-up deferrals under a safe harbor 401(k) plan in 2019, which $6,000. Again, please note that these deferral amounts can and do change annually.
- The employer must give the required notice at least 60 days (not just 30 days) before the beginning of the plan year.
- The employer cannot make a contribution other than the required nonelective or matching contribution.
