Do you offer your employees a retirement plan?
Providing a retirement plan in your benefits package can help you attract top talent, increase employee retention, and put your business on the path to success. But selecting the right retirement plan for your business and its employees is a complex decision.
When evaluating different plan options, ask yourself:
- What type of workers do you employ? (For example: full or part-time, older or younger than 21, new employees or long-term employees, etc.)
- Do you want to offer benefits to all employees or only certain groups?
- What benefits do you want to offer?
- How much can you budget for benefits administration costs?
Once you answer these questions, you can begin comparing plan options – such as 401(k) and SIMPLE IRA plans – to determine which is best for you, your business and your employees.
What’s the Difference Between a 401(k) and SIMPLE IRA Plan?
Both 401(k) and Savings Incentive Match Plan for Employees (SIMPLE) IRA plans help your employees save for retirement by allowing them to contribute to a savings account through salary deferral. However, the two plans have more differences than similarities. Some differences between a 401(k) and SIMPLE IRA include:
Employer Eligibility
While any business can offer a 401(k) plan, only those with 100 or fewer eligible employees may offer a SIMPLE IRA.
Employee Eligibility
As an employer, you may be able to set eligibility requirements less restrictive than the points below. However, the following conditions are most typical:
To be eligible to offer a SIMPLE IRA plan, your employees may be required to:
- Have been compensated at least $5,000 in any prior two years and
- Be reasonably expected to earn at least $5,000 in the current year
To be eligible to offer a 401(k) plan, your employees may be required to:
- Be at least 21 years old and
- Have worked at least 1,000 hours in the previous year
Employer Contribution Rules
Employer contributions to employee 401(k) accounts are fully optional. Additionally, if you do choose to contribute to your employees’ 401(k) accounts, you can implement a minimum amount of time an employee needs to work for your business before they receive contributions. Alternatively, SIMPLE IRAs require employers to make either a matching contribution of up to 3% of an employee’s pay or a 2% non-elective contribution based on the employee’s pay immediately upon hiring.
Contribution Limits
In 2025, SIMPLE IRA plans are subject to employee contribution limit of $16,500 per year (or $20,000 per year for those over 50). However, 401(k) plans have a higher limit: $23,500 annually (or $31,000 for those over 50).
Administrative Responsibilities
SIMPLE IRAs do not have any annual tax filing requirements and are typically easier to set up and administer. Administratively, 401(K) plans may take a bit more effort due to annual compliance testing and required annual tax reporting.
Investment Options
SIMPLE IRA plans allow account holders to invest in a broad range of options, including individual stocks, bonds, and mutual funds. The investment options available with a 401(k) plan are typically established by the plan sponsor.
Early Withdrawal and Borrowing Rules
Employees face significant early withdrawal penalties with both SIMPLE IRA and 401(k) plans if they want to use funds before retirement age. Some 401(k) plans may allow employees to borrow from their retirement account, while SIMPLE IRA plans never permit this.
Tax Credits
Thanks to the SECURE Acts of 2019 and 2022, employers starting new retirement plans that include automatic enrollment may be eligible for up to $16,500 in tax credits over three years. Eligible businesses that choose to give matching or profit-sharing contributions may qualify for an additional tax credit of up to $1,000 per employee. These credits are available for both 401(k) and SIMPLE IRA.
401(k) vs Simple IRA: How to Pick the Right Plan for Your Business
You’ll need to weigh the pros and cons of 401(k) and SIMPLE IRA plans against the unique needs of your business and employees to select the best plan.
For example:
- A 401(k) may be a better fit if you do not wish to provide employer contributions but want higher contribution limits.
- A SIMPLE IRA might be best if you only have a few employees or have a small budget for set up and administration costs.
Remember the quality of your retirement package can have a significant effect on the satisfaction of your employees. If recruiting and retaining top talent is a priority, you may want to consider introducing an attractive retirement plan, such as a 401(k). Although a 401(k) can require additional setup costs, 401(k)s also have higher contribution limits and may allow employees to borrow funds before retirement age, so employees often prefer them.
Sure401k®: 401(k) Plans Built for Small Business Owners
SurePayroll® By Paychex can help you set up a 401(k) for your business. Call 866-497-2028 to learn more about small business 401(k) plans today.
