SIMPLE vs 401k - Converting a SIMPLE to a 401(k)

Savings Incentive Match Plan for Employees, or SIMPLE is available in both IRA and 401(k) formats. SIMPLE IRAs are the most common, and are great as a starter plan for small businesses. But eventually the limitations of a SIMPLE will wear on an employer, so they may consider making the change to 401(k). October is the best time to consider converting a SIMPLE to a 401(k). SIMPLE notices are required to be delivered by November 2, so a decision must be made prior to that for the upcoming year. Learn more below about the differences between a SIMPLE vs 401k, and choose 401(k) today, before your chance for this year passes.



SIMPLE vs 401k

There are many limitations of a SIMPLE that may result in a desire to change to 401(k):

  • A SIMPLE can be the only plan of the employer, limiting total contributions
  • Employer contributions are required, but limited:
  • 2% of pay to all eligible employees, or


  • 3% of pay as a matching contribution are required.
  • No additional employer contributions may be made
  • Salary deferrals are lower than 401(k)
  • $12,500 with $3,000 catch up in the SIMPLE, vs.
  • $18,000 with $6,000 catch up in the 401(k)
  • No vesting of employer contributions
  • No participant loan provision in a SIMPLE IRA
  • Withdrawal penalties are 25% in the first two years of a SIMPLE
  • Employees are eligible for a SIMPLE at the beginning of their third year of employment (or less, as designated in the Adoption Agreement)
  • Only employers with less than 100 eligible employees may have a SIMPLE



401(k) plans have a great deal of flexibility, and can actually be less expensive than a SIMPLE in some circumstances. The advantages to 401(k) plans include:

  • Deferral limits are higher
  • Roth deferrals are available
  • Employer match can be set up as
  • Safe Harbor – to eliminate testing requirements, or
  • Fixed, orNew Call-to-action
  • Discretionary, or
  • All of the above
  • Profit Sharing contributions are optional, and may be allocated using any of a variety of formulas:
  • Pro-rata to each eligible employee
  • Integrated with Social Security
  • Age weighted
  • Tiered
  • Points system
  • Discretionary employer contributions may have additional requirements before an employee is eligible to receive an allocation:
  • Employment on the last day of the plan year, and/or
  • 1000 hours worked during the year.
  • These provisions can eliminate the requirement of making contributions for former employees.
  • Vesting schedules may apply to most Employer contributions. An employee may be required to work up to six years before they are fully vested
  • Total contributions to a participant in a 401(k) plan are as high as $54,000 in 2018, and $60,000 for those born in 1967 or earlier. Those limits are 2.5 times the amount that can be contributed to a SIMPLE
  • Investments are held in a single trust. Participants may be offered individual accounts to invest within choices available, or the trustee can manage all plan assets for the participants.



Most 401(k) plans do require annual administration and government reporting. That’s where Benefit Resources comes in, we'll help convert your SIMPLE to a 401(k) with a few easy steps:


  • Provide a notice to your employees that the SIMPLE will be discontinued at the end of the calendar year
  • Design and draft 401(k) plan documents to meet your specific needs
  • Work with the investment custodian of your choice to establish an account registered to the name of your plan. Your financial advisor will help you identify the custodian and the investments that will be available within your plan
  • The participants in the SIMPLE may transfer their balances to the 401(k) plan next year, so they can keep all of their retirement investments in one place
  • We will help calculate the employer contributions to the plan based on your annual employee census
  • All compliance testing will be performed as part of our annual work
  • Government reporting will be prepared for electronic submission as required by the Department of Labor and the Internal Revenue Service


Our services with respect to qualified plan administration is complete. Our fees are fully deductible, and establishing a new plan currently carries a $500 tax credit that you can take for the first three years of the plan.


Contact us today to discuss your options for converting your SIMPLE to 401(k), so that next year you’ll have the flexibility in design and contributions to help you meet your retirement plan goals.


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