If you’re like most small business owners or entrepreneurs, retirement planning tends to take a backseat to daily operations. But offering a retirement plan—without adding complexity or significant cost—can make a big difference for both you and your team. Enter the Simple 401(k): a tax-advantaged, straightforward retirement plan designed specifically for small businesses.
At Nth Degree CPAs, we help business owners take advantage of strategies that reduce taxes and build wealth. The Simple 401(k) is one of the easiest tools to implement when you’re ready to provide a competitive benefit to employees while securing your own financial future.
What Is a Simple 401(k)?
A Simple 401(k)—not to be confused with a traditional 401(k)—is a retirement savings plan designed for small businesses with 100 or fewer employees. “SIMPLE” stands for Savings Incentive Match Plan for Employees, and it offers a streamlined way for business owners to provide retirement benefits without dealing with the administrative burdens or high costs often associated with traditional plans.
For many small businesses, it strikes the right balance between ease of use, affordability, and tax advantages.
Key Benefits of a Simple 401(k)
1. Tax Advantages for Employers and Employees
Contributions made by employees are pre-tax, reducing their taxable income for the year. As the business owner, you can also make contributions that are tax-deductible, lowering your company’s overall taxable income.
2. Attract and Retain Employees
Offering a retirement plan can make your business more competitive in hiring. Many employees—especially those in competitive industries—consider retirement benefits a deciding factor when choosing an employer.
3. Lower Administrative Costs and Less Complexity
Unlike traditional 401(k) plans, a Simple 401(k) requires minimal paperwork, has no annual IRS filing requirement (Form 5500), and avoids nondiscrimination testing. This makes it a much simpler option for time-strapped entrepreneurs.
How Contributions Work
As the employer, you have two contribution options for the Simple 401(k):
1. Matching Contributions
You can match each employee’s salary deferral contribution dollar-for-dollar up to 3% of their compensation.
Example: If an employee earns $50,000 and contributes 3% ($1,500), you match $1,500.
2. Nonelective Contributions
Alternatively, you can contribute 2% of each eligible employee’s compensation, whether they participate in the plan or not.
Example: For an employee earning $50,000, you’d contribute $1,000 automatically.
Both options help reduce your taxable income while supporting your team’s retirement goals.
Who’s Eligible?
Employees are eligible if they earned at least $5,000 in compensation during any two prior calendar years and are expected to earn $5,000 in the current year.
There’s no age requirement, and eligibility criteria are minimal, making it an accessible benefit for most teams.
Considerations Before You Start
- You can’t offer any other retirement plans alongside a Simple 401(k).
- Contribution limits for 2025 are lower than traditional 401(k)s—$16,000 for employee deferrals, plus a $3,500 catch-up contribution for those 50 and older.
- Withdrawals are subject to early withdrawal penalties if taken before age 59½, and a 25% penalty may apply if funds are withdrawn within the first two years of participation.
Actions to Take Now
- Review Your Business Goals: A Simple 401(k) works best if you want to offer retirement benefits with minimal complexity and cost.
- Compare with Other Retirement Plans: If you’re planning rapid growth, you might consider whether a traditional 401(k) or SEP IRA fits better long-term.
- Get Professional Guidance: Setting up the right retirement plan requires understanding both the tax advantages and the administrative obligations.
Ready to explore whether a Simple 401(k) is right for your business?
Schedule a consultation with us today. Let’s build a strategy that works for you.
