SIMPLE 401(k) Plans

Small employers are permitted to offer a Savings Incentive Match Plan for Employees (SIMPLE plan) if they do not currently maintain another qualified plan. SIMPLE plans may be structured as an IRA or as a 401(k) plan — this module focuses on SIMPLE 401(k) plans.

The primary attraction of a SIMPLE 401(k) over a regular 401(k) is that it relieves smaller employers of the need to perform complex nondiscrimination testing and comply with burdensome top-heavy plan and reporting rules. The primary disadvantage is a lower level of allowable annual contributions.

SIMPLE plans are not available to all employers. Two conditions must be met:

• The employer must not maintain any other qualified retirement plan (except one covering collectively bargained employees)
• The employer must have 100 or fewer employees who received at least $5,000 in compensation during the preceding year

When counting employees, the employer must include all employees during the year, regardless of whether they are eligible to participate. Businesses under common control are treated as a single employer — employees of a parent company and subsidiary, or two businesses controlled by the same sole proprietor, are combined for this count.

Employers who exceed the 100-employee limit may continue operating a SIMPLE plan for up to two additional years after the year in which they first exceed the limit, providing a transition period.

To establish a SIMPLE 401(k), the employer must conform to regular 401(k) plan document requirements. The employer may:

• Establish a new 401(k) plan and elect to treat it under the SIMPLE rules, or
• Convert an existing 401(k) plan to SIMPLE rules (the IRS offers a model amendment for this purpose)

All SIMPLE plans operate on a calendar year basis. If an employer converts a fiscal-year 401(k) to a SIMPLE plan, the plan must be converted to a calendar year. The employer must also satisfy all other requirements applicable to regular 401(k) plans.

The SIMPLE plan must be available to every employee who:

• Received at least $5,000 in compensation from the employer during any two preceding calendar years (need not be consecutive), and
• Is expected to receive at least $5,000 in compensation during the current year

Employers may make the participation requirements less restrictive — including waiving the compensation thresholds entirely and covering all employees. Employers may exclude nonresident aliens and employees covered under a collective bargaining agreement, though all employees must still be counted for the 100-employee limit.

An employee may participate in a SIMPLE plan even if they also participate in another employer’s plan during the same year. Self-employed individuals are eligible to participate.

Unlike regular 401(k) plans where only employee elective deferrals are required, SIMPLE plans require the employer to make contributions every year. SIMPLE plans allow:

• Elective contributions from employees
• Matching or nonelective contributions from the employer (required)

Voluntary after-tax employee contributions are prohibited in SIMPLE plans.

Employees may contribute up to $17,600 per year (2026, inflation-adjusted). This is significantly less than the $24,500 limit for regular 401(k) plans. Employees age 50 or older may make an additional catch-up contribution of $3,850. Contributions are expressed as a percentage of compensation, so not every employee will be able to contribute the maximum dollar amount.

The employer must choose one of two formulas each year:

Matching Contribution Formula: The employer matches employee contributions dollar-for-dollar up to 3% of the employee’s compensation. Compensation for this purpose is capped at $360,000 (2026), meaning the maximum employer match is $10,800 (3% × $360,000). Employers using the matching formula must contribute every year — they may not skip a year if employees are deferring.

Nonelective Contribution Formula: The employer contributes 2% of each eligible employee’s compensation regardless of whether the employee makes any elective deferrals. Compensation is capped at $360,000, so the maximum nonelective contribution is $7,200 (2% × $360,000). The employer must notify employees of the nonelective formula before the 60-day election period.

Employers may deduct all SIMPLE contributions — both employee elective deferrals (treated as employer compensation) and employer matching or nonelective contributions — for the year in which they are made. Matching and nonelective contributions must be deposited by the employer’s tax return due date including extensions.

All SIMPLE contributions are excluded from the employee’s federal income tax. Employee contributions are subject to FICA and FUTA; employer contributions are not.

The annual additions limit (100% of compensation or $70,000 in 2026) also applies to SIMPLE 401(k) plans, in addition to the lower elective deferral cap.

The IRS requires a minimum 60-day election window during which employees decide whether to contribute to the SIMPLE plan. Typically this is the 60-day period before January 1. Plans may expand this window; some offer 90-day windows or quarterly 30-day windows.

The employer must notify all eligible employees of:

• Their right to make elective deferrals
• The type of employer contribution for the upcoming year (matching or nonelective)
• A copy of the plan’s summary statement prepared by the plan’s trustee

Employees may terminate participation at any time during the year by stopping their contributions. The employer may restrict employees from resuming participation until the beginning of the following year.

Employee contributions must be deposited as quickly as possible — no later than 15 days after the end of the month in which the contribution was withheld. Employer matching or nonelective contributions must be deposited by the employer’s tax return due date including extensions.

Under a SIMPLE 401(k), the ADP and ACP nondiscrimination tests are deemed satisfied if:

• Employee elective deferrals do not exceed the SIMPLE dollar limit ($17,600 in 2026)
• The employer makes matching contributions up to 3% of compensation, or alternatively makes a nonelective contribution of 2% of compensation for each eligible employee
• No other contributions are made under the arrangement

SIMPLE 401(k) plans that satisfy these requirements are also exempt from top-heavy plan rules. This exemption applies only to the SIMPLE plan, not to any other plans maintained by the employer.

All contributions to an employee’s SIMPLE account — both employee elective deferrals and employer contributions — must be 100% immediately vested and nonforfeitable. There is no deferred vesting schedule in a SIMPLE plan.

A SIMPLE 401(k) is subject to the same general withdrawal restrictions that apply to all 401(k) plans, including hardship distribution provisions. Contributions and earnings accumulate tax-deferred until withdrawn. Withdrawals are taxed as ordinary income. Early distributions are subject to the 10% premature penalty.

A participant who receives a distribution from a SIMPLE 401(k) may roll over all or part of it within 60 days to another qualified employer-sponsored plan or IRA (including a SIMPLE IRA) to defer taxation.

Participants who take a hardship distribution may not make elective deferrals to the SIMPLE plan or any other qualified plan for the following 6 months.

SIMPLE 401(k) plans may offer participants the ability to borrow funds. The maximum loan is the lesser of:

• $50,000, or
• 50% of the participant’s vested account balance

Loans are not treated as taxable distributions if:

• The plan document offers loans to all participants equally
• The loan is secured and carries a reasonable rate of interest
• The loan is repaid within five years (no time limit for loans used to acquire a principal residence)

If these requirements are not met, the borrowed amount is treated as a taxable distribution and may be subject to the 10% premature penalty.