Chapter 7 — SIMPLE 401(k) / SIMPLE IRA

The SIMPLE IRA is the most common form of SIMPLE plan. It is funded through employee salary deferrals and mandatory employer contributions deposited directly into individual IRA accounts established for each eligible employee. In this regard, a SIMPLE IRA plan functions similarly to a SEP-IRA: the employer makes contributions to IRAs rather than to a centralized trust.

The IRS provides a model SIMPLE IRA plan document — Form 5305-SIMPLE — that employers may use to establish the program. The process is straightforward:

• The employer completes Form 5305-SIMPLE (a two-page document).
• The employer notifies eligible employees of their right to participate and their deferral options.
• The employer ensures that each eligible employee has established an IRA account to receive contributions — employees choose their own IRA provider from options made available by the employer.
• Salary deferrals and employer contributions are deposited into the employees’ IRAs.

The completed Form 5305-SIMPLE is retained by the employer — it is not filed with the IRS. No IRS approval is required. This simplicity makes the SIMPLE IRA the least burdensome retirement plan option for most small employers.

Under a SIMPLE IRA, once contributions are deposited into an employee’s IRA they are entirely outside the employer’s control. The employee owns and controls the account — subject to standard IRA distribution rules and the SIMPLE IRA 2-year restriction on transfers and rollovers. Employers who are concerned about employees freely accessing plan funds shortly after contribution should consider the SIMPLE 401(k) instead.

A SIMPLE 401(k) plan combines the simplified contribution and nondiscrimination rules of a SIMPLE plan with the trust-based structure of a regular 401(k). It is more complex to set up than a SIMPLE IRA but offers the employer greater control over plan assets.

To establish a SIMPLE 401(k), the employer must comply with the requirements of a regular 401(k) plan — including adopting a written plan document and establishing a trust. There are two paths:

• The employer may establish a new 401(k) plan and elect to operate it under the SIMPLE rules from the outset.
• The employer may convert an existing 401(k) plan into a SIMPLE 401(k) by agreeing to operate under the SIMPLE contribution and vesting requirements. The IRS provides a model amendment for this conversion.

All SIMPLE plans — both SIMPLE IRAs and SIMPLE 401(k)s — must be maintained on a calendar year basis. If an employer converts an existing fiscal-year 401(k) plan to SIMPLE 401(k) status, the plan must be simultaneously converted to a calendar year. This means the employer cannot maintain a SIMPLE 401(k) on a non-calendar fiscal year.

The primary regulatory advantage of a SIMPLE 401(k) over a regular 401(k) is that a plan meeting the SIMPLE contribution and vesting requirements is deemed to automatically satisfy the otherwise complex ADP (Actual Deferral Percentage) and ACP (Actual Contribution Percentage) nondiscrimination tests. This eliminates the annual nondiscrimination testing burden.

However, unlike SIMPLE IRAs, SIMPLE 401(k) plans must still comply with all other rules governing qualified plans — including ERISA requirements, Form 5500 annual reporting, participant disclosure obligations, and vesting standards beyond the SIMPLE minimums.

Under a SIMPLE 401(k), contributions are held in an employer-maintained trust, not in individual employee IRAs. This gives the employer more control over when and how employees access funds — for example, early distributions from a SIMPLE 401(k) are subject to plan loan provisions and hardship rules, rather than the immediate self-directed access available under a SIMPLE IRA.