On Pointe – 401(k) Edition
Why is the SIMPLE IRA not so Simple?
Why is the SIMPLE IRA not so Simple?
Just try converting to a 401(k)… 3 reasons to consider a change AND why conversions aren’t so simple!
Yes, I’m biased when it comes to retirement plans. The 401(k) does seem to fit the bill for many companies. With costs coming down, new tax credits, and more mature uses for 401(k) keep it at the top of the list.
Additionally, I must admit that there are many cases where SIMPLE and SEP IRAs make sense. Yet, both have rigid rules and regulations that don’t always fit my independent advisory services.
One of my software clients out of Denver recently asked me about her SIMPLE plan. It had to do with one of her engineers who did not open an account. Were she and her company still on the hook to pay the employee’s match?
Some basics with SIMPLE plans… it is an acronym for Savings Incentive Match Plan. These are traditional IRAs for employees and employers to contribute to. SIMPLE plans are funded with contributions. These contributions (which are 100% vested for the employee) come in 2 different formulas. One is a matching contribution of 3% of compensation or a 2% nonelective contribution for each eligible employee. For more on SIMPLE IRA plans visit the IRS website HERE.
Hmmm…
Being a smart executive, you may be sniffing out some constraints with SIMPLE, more on that later.
Back to my client’s issue. Does she owe her employee “back-dated” contributions even though the employee chose not to participate? Sorry, not that easy. Shoot, I had to consult one of my trusted resources to find the answer!
So here goes…straight to the point (or On Pointe!) She did not have to pay the employee because she was using the 3% compensation formula. She would owe it if using the 2% nonelective (or basically a Profit Share).
Now, I don’t want to grind out the details of SIMPLE’s. And for the record, retirement plans, in general, are not “Simple”. For that matter, 401(k)’s are not easy either. But there was enough confusion for my client to consider other options. Options where she will have more control over the plan design.
So, while viewing the tips of the Rocky Mountains from her office near the stadiums, we started talking about 401(k).
First, big reason… you can save more. The 2023 limits for SIMPLE are $15,500 (if age 50 and over your catch-up contribution is $3,500). For 401(k) your limits are $22,500 with catchups of $7,500. The difference of $7,000 (or with catchups of $11k) may seem small. Remember, if the participant chooses, these are pre-tax and offer the opportunity for tax-deferred growth. Both types of plans offer higher savings limits than individual IRAs and Roth IRAs.
Next, you have much more flexibility with 401(k) plans. Where is flexibility? You have more latitude for eligibility requirements, vesting requirements, hardship distributions, and loans.
These were very important considerations for my client’s business. She is in a very competitive industry which leads to turnover. She’s also in a scaling phase and needs a more competitive plan to attract new employees BUT also keep her most productive employees.
This leads to a third reason to consider a conversion from SIMPLE to 410(k)… Flexible Employer Contribution options. I was alluding to some of these points earlier in this On Pointe.
Vesting is an important consideration for both the Employer AND Employee. Vesting is a schedule that determines how much and when the employee can keep should their employment end.
The variety of contributions an employer can make is of great value. This is where a seasoned TPA (Third Party Administrator) can be helpful. They will assess your employee census data and help guide you on the right type of contributions you should consider.
While there are a few more reasons to consider I felt we needed to work on a timeline for how to make a transition.
Most IMPORTANT, you can’t offer 2 plans in the same year. This means you’ll have to terminate your SIMPLE in one year to offer another (like 401(k) for the next year.
Also, rollovers have a timeline as well. Rolling from a SIMPLE to 401(k) can take place if the SIMPLE has been in place for 2 years.
There are a few other technicalities, but these are the 2 bigger hurdles.
Additional good news… You may be eligible for tax credits and even increase tax favorable treatment for both employee and employer.
That’s it for this On Pointe 401(k) edition. If you’d like a conversation about your SIMPLE IRA, here’s my scheduling LINK (for serious retirement inquiries only).
Take care,
Jim Gibbons
Alpha Pointe Capital
1997 Annapolis Exchange Parkway, Ste. 300
Annapolis, MD. 21401
www.alphapointecap.com
401k@alphapointecap.com
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Registered Representative of Thurston Springer Financial and Investment Advisor Representative of Thurston Springer Advisors. Securities offered through Thurston Springer Financial, Member FINRA, SIPC. Advisory services offered through Thurston Springer Advisors, an SEC Registered Investment Advisor. Alpha Pointe Capital is a DBA of Thurston Springer Financial and Thurston Springer Advisors.