Simple 401K plan features…
A subset of the 401(k) plan is the SIMPLE 401(k) plan. Just like the SIMPLE IRA plan, this is a plan just for you: the small business owner with 100 or fewer employees.
Under a SIMPLE 401(k) plan, an employee can elect to defer some compensation. But unlike a regular 401(k) plan, you the employer are obligated to make make either:
- A matching contribution up to 3% of each employee’s pay, or
- A non-elective contribution of 2% of each eligible employee’s pay.
No other contributions can be made and the employees are fully vested in any and all contributions.
If you establish a SIMPLE 401(k) plan, you:
- Must have 100 or fewer employees.
- Cannot have any other retirement plans.
- Need to annually file a Form 5500.
Pros and cons
- Plan is not subject to the non-discrimination rules that apply to everyday 401(k) plans.
- Employees are fully vested in all contributions.
- Straightforward benefit formula allows for easy administration.
- Optional participant loans and hardship withdrawals add flexibility for employees.
- No other retirement plans can be maintained.
- Withdrawal and loan flexibility adds administrative burden for the employer.
Who contributes
Employee salary deferrals and Employer contributions.
Contribution limits
Employee – $15,500 in 2023. (Catchup deferral – $3,500 in 2023)
Employer – A dollar-for-dollar match up to 3% of pay or a 2% non-elective contribution for each eligible employee.
Filing requirements
Annual filing of Form 5500 is required.
Participant loans
Loans are permitted although PATA does not recommend offering loans.
In-service withdrawals
Yes, but subject to possible 10% penalty if under age 59-1/2.
The Document…
The Plan Document that PATA uses is an IRS approved prototype format document. An approved document has been reviewed by the IRS and determined to be compliant with the IRS code governing pension plans. The benefit of the document PATA uses is that if the IRS decides to amend the IRS code governing pension plans, your plan will automatically be covered! For this service, there is an annual complaince usage fee of $200/year. It is a fee paid to maintain your document on PATA’s database . Unless you have an annual administration performed that $200 fee would be all it will cost to maintain your plan from year to year!
Investing your plan’s assets…
The benefit of establishing your Solo through PATA is that you can invest your contributions wherever you want! You are not locked into investing in the funds of the company you established your plan through. You can use your present broker**, invest on your own, or decide later how you want to manage the assets of your newly established Solo 401(k) plan.
* In addition to the one time setup fee, there is an annual compliance fee of $200 to keep the plan active on PATA’s document database. This fee will commence with the year following the initial plan year.
** If you do not have an established relationship with a financial advisor it is easy to establish an account on your own. If you need a licensed financial advisor to get started, PATA can assist you there as well.