Quick takeaways
Two popular options for employer-sponsored retirement savings plans are 401(k) plans and SIMPLE IRAs.
While both 401(k) plans and SIMPLE IRAs offer valuable benefits, they differ in several key areas, including contribution limits, employer contributions requirements, administrative responsibilities, and more.
Companies offering a SIMPLE IRA can now terminate their SIMPLE IRA and start offering a safe harbor 401(k) mid-year.
There's no such thing as a one-size-fits-all approach to retirement. Despite recent legislation aimed at making offering a traditional 401(k) plan more affordable, some small businesses turn to alternative plans that require less upfront costs or upkeep.
Certain business owners may turn to SIMPLE IRA. While not as robust as more traditional plans, they come without some of the challenges sometimes associated with establishing and maintaining a traditional 401(k) plan. Below, we'll dive into how the different plans compare — and how businesses can approach choosing a retirement plan that works for them.
Let's get started.
Understanding 401(k) plans
To better understand how these retirement plan options compare, let's first examine the basics of a traditional 401(k).
A 401(k) is a tax-advantaged, employer-sponsored retirement savings plan in which employees can contribute some of their salary to individual accounts. Employers can also contribute to these accounts. Businesses of any size can set up 401(k) plans for their employees.
401(k) deferrals:
In 2026, the deferral limit for 401(k) plans is $24,500, and $32,500 for employees 50 years of age and older (there's an additional extended catchup amount of $11,250 if you're aged 60-63).¹ These high contribution limits can be a big win for employees, especially when paired with a generous employer match and/or a profit-sharing contribution.
Employees can make two different types of deferrals to a 401(k) plan — traditional and Roth.
Traditional 401(k) contributions are made on a pre-tax basis, and funds are taxed upon withdrawal.2
With Roth 401(k) contributions, employees pay taxes on contributions before putting them into their retirement account, and they don't have to pay taxes on those withdrawals during retirement. The earnings that these contributions earn are also distributed tax-free, so long as certain criteria are met.⁴
401(k) employer matching:
With a traditional 401(k) plan, employers can match their employees' retirement savings. Your company can benefit from certain tax advantages by offering employees a 401(k) match. Providing a match can also encourage rank and file employees to defer into the plan which can help the plan pass some of its non-discrimination testing. Offering a match is discretionary — some employers choose not to match employee contributions at all.
401(k) plan compliance:
While offering a 401(k) plan can be a great way for businesses to attract and retain talent, such plans require considerable attention in the plan design phase and regular annual upkeep thereafter.
Without a third-party administrator, managing Form 5500 compliance, record-keeping, benefit distribution, and reporting obligations may seem daunting for some businesses. Then, there's the whole matter of potential fiduciary liability. That's a big reason why some business owners turn to SIMPLE IRA plans.
Hint: With Gusto Retirement as your 401(k) provider, we'll handle the heavy lifting. Our professionals advise you on plan setup and take care of plan administration, record-keeping, Form 5500 reporting, and much more.
Understanding SIMPLE IRA plans
Simple abbreviation, long name — Savings Incentive Match Plan for Employees plan invested in Individual Retirement Accounts, or SIMPLE IRAs. As its name suggests, these plans allow eligible employees to contribute to their own separate SIMPLE IRAs established in their names. These SIMPLE IRAs differ from the traditional IRAs that individuals might establish for themselves. SIMPLE IRAs were designed specifically to help small businesses with 100 or fewer employees.
SIMPLE IRAs are generally less expensive to administer than a regular 401(k) plan, making them attractive to companies who want to offer retirement benefits at a low price point. They also don't come with many of the compliance and reporting requirements associated with regular 401(k) plans. (SIMPLE IRAs are not subject to Form 5500 reporting requirements, for example.)
SIMPLE IRA contributions:
Like other retirement plans, employee contributions to a SIMPLE IRA are capped. The 2026 contribution limit is $17,000 and $21,000 for those 50 years of age or older. Employees aged 60, 61, 62 and 63 who participate in SIMPLE plans can contribute up to $22,250. To be eligible to contribute to a SIMPLE IRA an employer can require that employees must have earned at least $5,000 during any two prior years and are expected to earn at least $5,000 in the current year.¹
As is the case with traditional 401(k) plans, contributions can be made on a pre-tax or Roth basis. However, Roth SIMPLE IRAs are new and still fairly rare. Generally, the taxation rules for SIMPLE IRA distributions are the same as for traditional 401(k) plans.
SIMPLE IRA employer contributions:
Here's one area where 401(k) plans and SIMPLE IRAs differ. SIMPLE IRAs require employers to contribute to eligible employees' accounts. These contributions can either take the form of a flat percent of employee pay of either 2 or 3% (depending on number of employees and elections made by the plan sponsor), regardless of whether or not the employee elects to contribute, or a dollar-for-dollar match of the eligible employees' contributions, up to 3 or 4 percent of salary, once again depending on number of employees and elections made by the plan sponsor.
And unlike 401(k) plans, employees are always 100% fully vested in their own contributions and their employer contributions, meaning that they are entitled to keep the full amount contributed, no tenure requirements attached. In return for this required contribution, the employer's plan does not undergo annual nondiscrimination testing, unlike a regular 401(k) plan.
SIMPLE IRA distributions:
Like other IRAs, owners of a SIMPLE IRA can take a distribution whenever they choose. Cash distributions from most retirement accounts before the age of 59 ½ are subject to an early distribution penalty tax of 10% unless a [penalty exemption] (https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-on-early-distributions) applies. However, there is a two-year rule for SIMPLE IRAs which increases this penalty to 25% and applies it to rollovers to anything other than another SIMPLE IRA as well as cash distributions.3 The two-year waiting period begins on the first day an employer deposits a contribution to the SIMPLE IRA account. The only exception to this two year period is if the employer terminates the SIMPLE IRA and the participant rolls the money over to another plan that limits the distribution of rollover assets to match those of safe harbor contributions.
After two years, employees can roll over to an IRA or eligible retirement plan without penalty and the normal 10% early distribution penalty will apply.3
401(k) plans vs. SIMPLE IRA
There are a few key differences between 401(k) plans and SIMPLE IRA plans, such as contribution limits, and employer matching options. The table below breaks down a few of the key differences.
Feature | 401(k) | SIMPLE IRA
|
Contribution types | Traditional and Roth | Traditional and Roth |
Contribution limits | $24,500, plus $8,000¹ catch-up if age 50 or over; $11,250 extended catch-up if ages 60–63. | For companies with fewer than 26 employees, $18,100, plus $3,850¹ catch-up contributions for ages 50+. For companies with more than 25 employees, $17,000, plus $4,000 in catch-up contributions; $5,250 extended catch-up for ages 60–63. |
Employer contributions | Optional — employers can make contributions including a match, profit sharing, and safe harbor contributions | Mandatory — 3 or 4% match or 2 or 3% nonelective contribution |
Distributions | Controlled by the selections made by the employer. Deferrals and safe harbor contributions cannot be distributed before age 59 ½, death, or termination of service except in cases of hardship or certain military service.² | Can withdraw at any time, subject to the general limitations imposed on traditional IRAs.³ |
Required minimum distributions | Yes, for non-Roth assets | Yes, for non-Roth assets |
Loans | Allowed | Not allowed |
Rollovers | Yes | Yes, once the 2-year waiting period has passed |
Protection | Full protection from bankruptcy and creditors (with limited exceptions). | Federal Bankruptcy protection up to $1 million. Creditor protection varies by state. (California and Maine offer partial protection, and Texas is fully protected.) |
Transitioning from a SIMPLE IRA to 401(k) mid-year
In general, SIMPLE IRA plans are meant for companies with 100 or fewer employees. But as your workforce grows or your company's priorities change, it becomes increasingly important to reconsider your retirement offering. The higher contribution limits and greater potential for employer contributions are reasons that your employees may be just as eager to make the change.
As of January 1, 2024, the SECURE Act 2.0 allows employers to transition from offering a SIMPLE IRA to a safe harbor 401(k) mid-year instead of only at the beginning of the calendar year. This change is particularly helpful for growing small businesses that may want a different type of retirement plan to better meet their needs.
The first step in switching from a SIMPLE IRA to a 401(k) mid-year is to formally document the SIMPLE IRA plan's termination date and ensure the Safe Harbor 401(k) plan is effective the day after the termination date. Keep in mind that when switching mid-year, the SIMPLE IRA plan must be replaced by a Safe Harbor 401(k) plan. The replacement must be complete by October 1st and requires that employers provide employees with 30 days advance notice that the SIMPLE IRA plan will be terminated, as well as a Safe Harbor notice at least 30 days before the new 401(k) plan's effective date.
Choosing a retirement plan that meets your needs
Both SIMPLE IRA and 401(k) plans offer benefits to employees when saving for retirement, and both plan types can help employers provide competitive offerings when it comes to attracting and retaining talent.
If you determine that switching from a SIMPLE IRA to a 401(k) is the right move for your organization, Gusto Retirement can facilitate the transfer process. Gusto Retirement helps employers choose a plan that fits their business goals, and gives your team access to live support, guided employee onboarding, a mobile app, and more.
The information provided in this blog post is accurate and up-to-date as of January 2026. IRS plans and limits are subject to change. Please consult a Financial Professional for the most current information regarding your specific financial situation.
This content is for informational purposes only and is not intended to be construed as tax advice. You should consult a tax professional to determine the best tax advantaged retirement plan for you.
FAQs
What is a SIMPLE IRA and how is it different from a 401(k)?
A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a retirement plan designed for small businesses with 100 or fewer employees. The biggest differences from a 401(k) are that: 1) employer contributions are mandatory with a SIMPLE IRA — employers must either match employee contributions up to 3 or 4% of salary or contribute a flat 2 or 3% of pay for all eligible employees and 2) SIMPLE IRA have lower contribution limits than a 401(k). Also, 401(k) gives employers more flexibility, including making employer contributions entirely optional.
What are the contribution limits for a SIMPLE IRA vs. a 401(k)?
In 2026, employees can contribute up to $17,000 to a SIMPLE IRA — or $18,100 if their employer has 25 or fewer employees or whose employer elected to make the higher employer contribution. For those aged 50+, the limit increases to $21,000 (or $21,950 for employees at smaller/electing companies). For those aged 60-63, the limit is $23,350 regardless of company size.
By comparison, the 401(k) limit is $24,500, with a $32,500 limit for those aged 50+.¹ The super catch up limit for those aged 60-63 is $35,750. The 401(k) limits are significantly higher than SIMPLE IRA limits, which can make a meaningful difference for employees and owners looking to maximize their retirement savings.
Can a company switch from a SIMPLE IRA to a 401(k)?
Yes. As of January 1, 2024, the SECURE Act 2.0 allows employers to transition from a SIMPLE IRA to a safe harbor 401(k) mid-year — not just at the start of the calendar year. The switch must be complete by October 1st, and employers must give employees at least 30 days advance notice of the SIMPLE IRA termination and a Safe Harbor notice before the new 401(k) takes effect.
What is the 2-year rule for SIMPLE IRAs?
The 2-year rule means that employees must wait two years from the date their employer first contributes to their SIMPLE IRA before rolling those funds into a different IRA or retirement plan or taking a cash distribution. If funds are moved before the two-year period ends, the early withdrawal penalty is 25% — much steeper than the standard 10%. The clock starts on the date of the employer's first contribution.
Are employer contributions to a SIMPLE IRA required?
Yes. Unlike a 401(k) where employer contributions are optional, a SIMPLE IRA requires employers to contribute every year. Employers must choose between matching employee contributions dollar-for-dollar up to 3 or 4% of compensation, or making a flat nonelective contribution of 2 or 3% of pay for all eligible employees — regardless of whether those employees contribute themselves.
Disclosures
¹ May be adjusted annually to account for IRS cost-of-living adjustments. Learn more.
² Taxable distributions made before age 59 ½ are subject to a 10% early withdrawal penalty tax unless an exception applies.
³ Distributions taken before the 2-year waiting period has passed are subject to a 25% early withdrawal penalty tax regardless of the penalty exemptions. Taxable distributions made before age 59 ½ and after the 2-year waiting period are subject to a 10% early withdrawal penalty tax unless an exception applies.
⁴ Roth distributions will generally be tax-free if the following conditions are met: (a) Roth contributions are always distributed tax-free. The earnings on Roth contributions will be tax-free if the following conditions are met: (a) you're either over age 59 ½, disabled, or have died AND (b) it has been 5 years since your first Roth contribution under the current plan. Please consult a qualified financial advisor or tax professional to determine what is applicable to your financial situation.
