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Is it just me or is the SIMPLE not?

Is it just me or is the SIMPLE not?

| May 08, 2024

I am pretty sure I ran into the Savings Incentive Match Plan for Employees IRA (SIMPLE-IRA or just SIMPLE) back in the late 1990s. This type of retirement plan was created by the 1996 Small Business Job Protection Act. But is it me or are SIMPLEs not so simple?

A SIMPLE allows employees to contribute on a pre-tax only basis up to a maximum limit. For 2024, that limit is $16,000 for those under 50 and $19,500 for us in the 50 and old crowd. Employee contributions are matched $1:$1 up to 3% or the employer may elect to make a 2% flat contribution for all employees whether they contribute or not.

Just about everyone qualifies for the SIMPLE provided they earned at least $5,000 in the last two years from the sponsoring employer and expect to make $5,000 in the current year. I would think that those earning less than $5,000 might see this job as "for fun" or as a tertiary job/ not likely to contribute in any case. And a SIMPLE was designed for employers with 100 employees or less.

A few thoughts regarding SIMPLEs.

  1. Employees who want to contribute after-tax Roth or both pre-tax and Roth are out of luck. Pre-tax only.

  2. An employer may not stop the 3% match or 2% non-elective contribution even if cashflow is strained.

  3. Terminating a SIMPLE (until this year) could only be done at year-end with a termination notice given out by November 1.

  4. And of relevance to the folks I chat with, ESG SIMPLEs are not that simple to find.

  5. Contribution limits are lower in the SIMPLE that a 401k.

  6. Rolling over a SIMPLE is not. The SIMPLE account must be open for at least two years even if the employee has left the sponsoring company.

  7. Employers may find that with the 3% or 2%, a 401k with a discretionary match may be less expensive and more friendly to cashflow.

On the plus side, SIMPLEs tend be less costly to administer and are easier to manage from an operations point of view.

I must admit I was cheered when I saw in SECURE 2.0 that a SIMPLE can be terminated mid-year and converted to a 401k. And it seemed fair that SECURE 2.0 requires the new 401k be a safe-harbor non-elective plan for the first year. But wait until you see the formula for calculating the maximum contribution in the first year for the 401k. The SIMPLE contribution limit is pro-rated over the number of days the SIMPLE was in existence and the same for the 401k. Those two prorated numbers are added together to reach the first year contribution limit.

As one business partner put it, assuming a SIMPLE was terminated on 8/1 and a 401k started on 8/2 then:

The first year contribution limit is determined by taking the number of days covered in the SIMPLE IRA multiplied by its contribution limit (212/365 x 15,500 (19,000 including catch-up) = $9,002.74 ($11,035.62) and adding the number of days covered in the 401(k) plan multiplied by its contribution limit (153/365 x 22,500 (30,000 including catch-up) = $9,431.51 ($12,575.34).

Is it simple enough to say your head is simply spinning? Let's chat and explore all retirement plan options before you start a SIMPLE.