What Is the Difference Between a SIMPLE IRA and a SIMPLE 401(k) Plan?


The Savings Incentive March Plan for Employees of Small Employers (SIMPLE) were created by the Small Business Job Protection Act of 1996. A SIMPLE IRA is a tax-deferred retirement savings account for the employee. A SIMPLE 401(k) is a plan structure that is largely a cross between the SIMPLE IRA and a traditional 401(k) plan. 

For both the SIMPLE IRA and the SIMPLE 401(k), employers must have no more than 100 employees,  each of whom must have received at least $5,000 in compensation in the prior year.  All contributions are immediately 100% vested for each. Employees may make salary-deferral contributions and employers may choose to make matching contributions. If so, they must contribute dollar for dollar up to 3% for matching contributions. For non-elective contributions, employers must contribute 2% of the employee's compensation. Catch-up contributions above age 50 are also available.     

Beyond that, the major difference between the SIMPLE IRA and the SIMPLE 401(k) is that the two plans require/allow different employer contribution amounts and compensation caps.  Ultimately, these could have an impact at the employer level when making a plan structure choice for the organization. For employees, the differences would appear at very significant compensation levels where a SIMPLE 401(k) may have a lower compensation cap.