Facts About the SIMPLE 401k plan

A SIMPLE 401k plan is a plan is an intersection between a traditional 401k plan and a SIMPLE IRA, and offers you the best features of both plans.

The highlights of a SIMPLE 401k plan are the following:

• While an employer who decides to adopt a traditional 401k plan for his business requires hiring costly professionals for testing purposes, a SIMPLE 401k plan does not require any tests. This therefore makes it cheaper, and more attractive especially to small businesses.
• As with the traditional 401k plan, loans are allowed from a SIMPLE 401k plan. This feature makes the plan very appealing since participants as well as employers, like the idea of being able to borrow funds from their own account.
A SIMPLE 401k plan also has some disadvantages, as listed below:
• Contributions made into a SIMPLE 401k plan have to be immediately vested, and this may result in high staff turnover
• On a SIMPLE 401k plan, the contribution limits are lower than the ones on a traditional 401k plan. While on a traditional 401k plan an employee may defer up to 25% of his total salary, on a SIMPLE 401k plan he can contribute up to a maximum of 3%.
• If an employer decides to set up a SIMPLE plan, unfortunately he cannot then set up a traditional 401k plan, for employees who are not entitled to contribute in the SIMPLE plan.
Regarding eligibility:
• A SIMPLE 401k plan may be adopted by the same employers who are eligible for the traditional 401k plan, with only one difference. An employer needs to have a maximum of 100 employees to be able to adopt this plan.
• As regarding employees, every employee who is 21 years of age, and has been employed for minimum 1 year, is eligible.

Reference: http://www.investopedia.com/articles/retirement/04/052604.asp