SIMPLE 401k

By Jason Watson, CPA
Posted Monday, December 30, 2024

If you have employees beside your spouse, a SIMPLE 401k might be a good option. Under a SIMPLE 401k plan, an employee can elect to defer some of his or her compensation. But unlike a traditional 401k plan, the employer must make either-

• A matching contribution up to 3% of each employee’s pay up to $350,000 (for the 2025 tax year), or

• A non-elective contribution of 2% of each eligible employee’s pay (non-elective means that the business must do it without fail to maintain the plan’s integrity)

No other contributions, such as profit sharing, can be made and the employees are totally vested in any and all contributions. You can only have 100 or fewer employees, and no other retirement plan is allowed. SIMPLE 401ks are also not subjected to discriminatory testing of highly compensated employees (HCEs) unlike traditional 401k plans.

Contributions are $16,500 for the 2025 tax year plus $3,500 for catch-up.

SIMPLEs have fallen out of favor recently since the only real benefits were no testing and low costs- that has changed a lot lately since the landscape of 401k plan providers is much more competitive (low cost) and lawmakers have given us 401k with safe harbor provisions so therefore no highly compensation employee (HCE) testing.

We haven’t seen these plans get deployed with any kind of regularity since Bush was president. As in the first one.