SIMPLE plans help small businesses provide retirement plans to their employees while also offering a way for the self-employed to take advantage of the tax benefits of employer-sponsored retirement plans.

What does SIMPLE stand for?

SIMPLE stands for “savings incentive match plan for employees.” SIMPLE plans are only available to companies with no more than 100 employees, including the self-employed. The business cannot have another type of retirement plan at the same time as a SIMPLE plan.

Small businesses can decide between a SIMPLE IRA or SIMPLE 401(k), as well as another type of small business retirement plan called a SEP IRA. Each plan has its own strengths and weaknesses, and all differ from the “traditional” 401(k) plan.


A SIMPLE IRA is a tax-deferred retirement savings account that may be established by small business owners with 100 or fewer employees who receive at least $5,000 in compensation annually. Employers contribute to the plan.

With a SIMPLE IRA, each employee has an individual IRA. This is the big difference when considering a SIMPLE IRA vs. a SIMPLE 401(k), where employees all contribute to a larger investment fund.

Contribution limits are an important consideration. A SIMPLE IRA allows employees to make annual contributions of up to $13,000, higher than the $6,000 limit for traditional IRAs. SIMPLE 401(k) plans have contribution caps of $13,000, lower than the traditional 401(k)’s $19,000 limit.

SIMPLE plan vs. 401(k) plan

SIMPLE 401(k) plans differ from normal 401(k)s in several ways, but the most important is that with a SIMPLE 401(k), the employer is obligated to match up to 3 percent of the employee’s pay or pay a 2 percent non-elective contribution per employee. Employer contributions to a traditional 401(k) are not mandatory.

SEP IRA vs. 401(k) plans

SEP IRAs — simplified employee pension IRAs — are a popular choice for self-employed individuals and small business owners who want to provide retirement plans for both themselves and their employees.

SEP IRAs have higher contribution limits than traditional IRAs or 401(k) plans. With a SEP IRA, your contribution limit is either 25 percent of your annual compensation or $56,000, whichever is lower.

SIMPLE plans and self-employed individuals

SIMPLE plans and SEP IRAs can help self-employed individuals prepare for retirement. If you are self-employed, the IRS has a thorough explanation of how to calculate your retirement plan contributions.

The bottom line

If you work for a small business, you may have access to a SIMPLE plan. Businesses that want to take advantage of SIMPLE plans can only offer one plan, so they need to consider the benefits of each plan carefully. For employees, SIMPLE plans offer a chance to add employer-sponsored savings plans to their personal savings and other retirement planning options.

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