3777 / How does a SIMPLE 401(k) plan differ from a 401(k) safe harbor plan?
SIMPLE 401(k) plans ( Q 3778) provide a design-based alternative to the use of a safe harbor plan. Some of the differences between safe harbor plans and SIMPLE 401(k) plans are as follows:
(1) Employees covered by a SIMPLE 401(k) plan may not be participants in any other plan offered by the employer, although employees participating in a safe harbor plan may be covered by more than one plan.
(2) SIMPLE 401(k) plans are subject to the lower dollar limits on elective deferrals and catch-up contributions that apply to SIMPLE IRAs, rather than those applicable to traditional 401(k) plans.
(3) Employers offering a SIMPLE 401(k) plan may not offer any contributions other than those provided under the SIMPLE 401(k) requirements, although employers maintaining a safe harbor plan may do so within the limitations described in Q 3775.
(4) Safe harbor plans may be offered by any employer, although SIMPLE 401(k) plans are available only to employers with 100 or fewer employees earning $5,000 or more in the preceding year.
(5) Contributions required under a safe harbor design may be made to a separate plan of the employer, although contributions required under a SIMPLE 401(k) design must be made to the SIMPLE 401(k) plan.
(6) A SIMPLE 401(k) plan must provide the required notice to employees at least
60 days before the beginning of the plan year while safe harbor 401(k) plans must provide notice at least 30 days before the beginning of the plan year, except in the case of certain nonelective contribution safe harbor plans.1
(7) A SIMPLE 401(k) plan cannot be established by completing IRS Form 5304-SIMPLE or IRS Form 5305-SIMPLE. It requires a formal written plan document.
Planning Point: A SIMPLE 401(k) must file a Form 5500 but SIMPLE IRAs do not. Anyone considering a SIMPLE 401(k) plan can accomplish the same funding in a SIMPLE IRA. Note that the penalties for failing to file a Form 5500 are steep and increase with every day the filing is late. Pre-SECURE Act, the IRS could assess a penalty of up to $25 per day with a cap of $15,000 per year. Effective for years beginning after December 31, 2019, the penalty has increased to $250 per day for late filers and up to $150,000 per plan year (note that the additional DOL penalty exceeds $2,000 per day with no annual cap).2
Planning Point: The SECURE Act now allows employers to adopt retirement plans after the close of the employer’s tax year (by the due date, including extensions, for filing its tax return). The employer may elect to treat the plan as having been adopted as of the last day of the tax year (the new rule applies after December 31, 2019). If an employer adopts a plan prior to the tax filing deadline and treats the plan as having been adopted as of the last day of the employer’s 2020 tax year, the plan sponsor is not required to file Form 5500 for the plan year that begins during the employer’s 2020 tax year. The first Form 5500 required to be filed instead will be the 2021 Form 5500. The plan sponsor should check a box on the 2021 Form 5500 indicating that the employer elects to treat the plan as retroactively adopted as of the last day of the 2020 tax year.