SIMPLE 401k or SIMPLE IRA

As a business owner, choosing a retirement plan for your employees should be one of the most important financial decisions you may take. This is so because a retirement may be a factor that helps you attract and maintain employees.

Both the SIMPLE 401k plan and SIMPLE IRA are targeted for businesses which employ a maximum of 100 employees. So what should you choose? Both plans offer advantages as well as disadvantages, which will help you ascertain which the best option for your business is:

• Employers, who choose to go for the SIMPLE 401k plan, may also choose to maintain another plan, for those employees who are not eligible for the SIMPLE 401k. Adversely, if an employer opts for a SIMPLE IRA, he will not be allowed to have any other plan, not even for non eligible employees.
• The SIMPLE 401k plan requires employees to be 21 years of age and employed for at least 1 year to be eligible to make contributions. A SIMPLE IRA on the other hand, has no age limits.
• Neither plan is required to perform non-discrimination testing, and both plans are subject to a 60 day notice.
• On the IRA loans are not allowed, while on the SIMPLE 401k plan, the employer may choose to include the loans option for his employees.
• Contributions for both plans should be immediately and fully vested.
• For both plans, the employees will make a contribution from pre taxed income, with the employer having the option to match. The payments are however subject to different capping rules, which may have different results.
• When an employer decides in favour of making matching contributions, on the IRA he will have the option of decreasing his match to less than 3%, but more than1%, for every 2 years out of 5. SIMPLE 401k plans do not offer this option.

Reference: http://www.investopedia.com/articles/retirement/04/060904.asp