Is your practice or workforce changing? It might be time to consider introducing a 401(k) Plan, or to consider whether a 401(k) is now a better option for you and your employees than the SIMPLE IRA Plan or SEP you currently offer.
Why consider a 401(k)?
A 401(k) Plan can offer you more options so that you can elect plan provisions that fit your situation. And, since a 401(k) Plan can be amended it provides you with more flexibility to make changes to the plan in the future as circumstances for your practice or workforce change. The chart below compares some of the key features and differences of a 401(k) Plan, a SIMPLE IRA Plan and a SEP-IRA.
Here are some of the key features under a 401(k) Plan that may be more beneficial to you and your employees than a SIMPLE IRA Plan or a SEP-IRA:
- Participant elective deferral contribution limits are higher than IRA limits.
- Allows participants to contribute to the plan thus increasing their savings.
- The plan sponsor may make matching or profit-sharing contributions that are fixed or discretionary, unless adopting a safe harbor plan requiring a fixed contribution.
- Vesting may be earned over time, for certain contributions, helping to retain employees.
How to make a change
If you’re interested in replacing a SIMPLE IRA or SEP IRA with a 401(k), talk to your financial or tax advisor to help determine if moving to a 401(k) Plan is right for your practice. Keep in mind it’s best to get the wheels in motion a few months before you want the plan to go live – in order to meet the participant notification requirements. And, if your new plan will benefit from certain 401(k) Plan provisions such as safe harbor or automatic enrollment – those require advance participant notification as well.
| Feature | 401(k) Plan | Simple IRA Plan | SEP-IRA |
| Eligibility | Generally, age 21 and 1000 hours of service in 12 months or any more liberal conditions. May exclude certain classes of employees if minimum coverage testing can be passed. For long-term part-time employees, 500 hours/year in a 3-year period, reduced to a 2-year period beginning in 2025. | Employees earning at least $5,000 in any 2 preceding years and expected to earn at least $5,000 in the current year (or any less restrictive conditions defined by the employer). May exclude only union employees and nonresident aliens with no U.S. income from the employer. | Age 21, has worked for the employer in at least 3 of the last 5 years, and received at least $750 in compensation from the employer during the year. May exclude only union employees and nonresident aliens with no U.S. income from the employer. |
| Contributions | Participants: pre-tax elective deferrals, Roth deferrals or post-tax voluntary. Employer: discretionary or fixed* match based on elective or Roth deferrals and/or a profit-sharing contribution. *Safe harbor 401(k) employer contributions must be fixed generally up to a 4% match or a 3% non-elective. | Participants: pre-tax salary reduction contributions and Roth deferrals.* Employer (required): (1) match that is dollar for dollar on deferrals up to 3%, or (2) a nonelective contribution that is 2% of each eligible employee’s compensation. SECURE 2.0 allows an additional discretionary employer contribution of 10% of compensation up to $5,000 adjusted for the cost of living each year. *SECURE 2.0 allows participants to designate SIMPLE IRA contributions as Roth amounts beginning in 2023. | Participants: no contributions are permitted.* Employer: discretionary contribution allocated uniformly to all eligible employees or an integrated formula. *SECURE 2.0 allows participants to designate SEP IRA contributions as Roth amounts beginning in 2023. |
| 2024 Contributions Limit | Aggregate of pre-tax and Roth deferrals can’t exceed $23,000 plus $7,500 for participants eligible to make age 50 and older catch-up contributions. Total employee and employer contributions cannot exceed the lesser of 100% of compensation or $69,000 per employee (plus the additional catch-up for eligible employees). | Salary reduction contribution limit is the lesser of 100% of gross compensation or $16,000 plus $3,500 for participants eligible to make age 50 and over catch-up contributions. SECURE 2.0 allows Qualified employers sponsoring SIMPLE plans to increase the deferral and catchup limits to 110% of the 2024 limits adjusted each year for cost of living. Qualified employers include those with: (1) 25 or fewer employees, or (2) more than 25 employees who make either a 4% match or 3% non-elective contribution. | No salary reduction contributions or elective deferrals are permitted. Employer contribution cannot exceed the lesser of 25% of total gross compensation of eligible participants or $69,000. |
| Distributions | Severance from employment, death, disability, at age 59½ or at plan termination. In-service withdrawal of deferrals for hardship or for other contributions at a stated age or after a fixed number of years. | Any time upon request. | Any time upon request. |
| Early Withdrawal Penalty | 10% Early Withdrawal Penalty on pre-tax cash distributions unless the participant is age 59½ or older (or another exception applies). | 25% Early Withdrawal Penalty on pre-tax distributions taken within two years of the date the individual first begins participating in the SIMPLE IRA unless the IRA holder is age 59½ or older, rolls into another SIMPLE IRA plan, (or another exception applies). Beginning in 2024, this penalty is waived if rolled to 401(k) or 403(b) plan maintained by employer. | 10% Early Withdrawal Penalty on pre-tax cash distributions unless the participant is age 59½ or older (or another exception applies). |
Consider the ABA Retirement Funds Program
The ABA Retirement Funds Program offers a different kind of retirement plan; built by lawyers and powered by pros. Contact us to learn more.
This information is for educational purposes only; it is not intended to provide legal, tax, or investment advice. All investments are subject to risk. Please consult an independent tax, legal, or financial professional for specific advice about your individual situation. Each business must consider the appropriateness of the investments and plan services offered to its employees.
The ABA Retirement Funds Program is available through the American Bar Association as a member benefit.
Registered representative of and securities offered through Voya Financial Partners, LLC (member SIPC).
Voya Financial Partners is a member of the Voya family of companies (“Voya”). Voya, the ABA Retirement Funds, and the American Bar Association are separate, unaffiliated entities, and not responsible for one another’s products and services.
CN3475356_0326