SIMPLE 401(k) Plans

An employer may adopt a Savings Incentive Match Plan for Employees (SIMPLE plan) as part of a 401(k) arrangement. For the employee, there is little or no difference between a SIMPLE IRA and a SIMPLE 401(k) plan because the eligibility and maximum contribution rules are the same. From an employer's perspective, a SIMPLE 401(k) plan is somewhat easier to maintain than a regular 401(k), but not much. The major advantages of a SIMPLE 401(k) plan relate to distributions from the plan.

Limits on the amount of elective deferrals that you can contribute to a SIMPLE 401(k) plan are different from those in a traditional or safe harbor 401(k).For 2013 and 2014, the maximum contribution is $12,000.

Distributions. A SIMPLE 401(k) plan is generally subject to the same distribution rules as all 401(k) plans. Hardship withdrawals can be made, for example, if a participant has an immediate and heavy financial need and there are no reasonable means available to help. Also, SIMPLE 401(k) plans only have to pay a 10 percent early distribution penalty tax, unlike SIMPLE IRAs that must apply a 25 percent penalty.

A SIMPLE 401(k) plan can be rolled over to another employer sponsored qualified retirement plan, including a tax-sheltered annuity, or to an IRA. However, distributions from a SIMPLE 401(k) plan cannot be rolled over to a SIMPLE IRA. Contributions to a SIMPLE IRA are limited only to employee elective contributions, employer matching or nonelective contributions, and rollover contributions from a SIMPLE IRA. Similarly, rollovers between SIMPLE 401(k) plans are not allowed because such plans may only receive elective and matching contributions.

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