3778 / What are the requirements for a SIMPLE 401(k) plan?
Editor's Note: Under the SECURE Act 2.0, SIMPLE plan sponsors may allow employees to elect to treat employer contributions to SIMPLE accounts as Roth contributions (beginning in 2023 and thereafter).
Of all the types of qualified plans that are permitted under the IRC, the SIMPLE 401(k) may be the least attractive to a plan sponsor. These plans retain all the eligibility, documentation, and reporting requirements of a qualified plan but are subject to the lower limits and other restrictions of a SIMPLE IRA. A SIMPLE 401(k) plan allows an eligible employer to satisfy the actual deferral percentage test for 401(k) plans ( Q 3802) by meeting the plan design requirements described below, instead of performing annual ADP testing.1 For a comparison of the features of a SIMPLE 401(k) plan to those of a safe harbor 401(k) plan, see Q 3777.
An eligible employer is one that had no more than 100 employees earning at least $5,000 of compensation from the employer for the preceding year.2 An eligible employer that establishes a SIMPLE 401(k) plan for a plan year and later ceases to be eligible generally will be treated as eligible for the following two years. If the failure to remain eligible was due to an acquisition, disposition, or similar transaction, special rules apply.3
In addition to all the requirements of IRC Section 401(k), a SIMPLE 401(k) plan must meet the contribution and other requirements of SIMPLE IRAs. Those requirements include a contribution requirement, an exclusive plan requirement, and a vesting requirement ( Q 3706, Q 3709).4
The SIMPLE 401(k) contribution requirement includes the following: (1) eligible employees must be able to make salary deferral contributions to the plan, (2) the amount to which the election applies may not exceed $16,500 in 2025 ($16,000 in 2024, $15,500 in 2023; $14,000 in 2022; $13,500 in 2020-2021), and (3) the employer must make matching contributions or nonelective contributions under one of the formulas described below.5
A SIMPLE 401(k) plan also may permit catch-up salary deferral contributions by participants who have attained age 50 by the end of the plan year.6 The limit on catch-up contributions to SIMPLE 401(k) plans is the same as for SIMPLE IRAs. The maximum catch-up contribution is the lesser of $4,000 in 2025-2026 ($3,500 (in 2023-2024; $3,000 in 2015-2022) or the excess (if any) of the participant's compensation over any other elective deferrals for the year made without regard to the catch-up limits.7
Planning Point: Beginning in 2024, employers may increase the contribution limits to SIMPLE plans. If the employer has 25 or fewer employees with at least $5,000 in compensation in the preceding year, the employee annual deferral limit to SIMPLE plans will increase to 10% of the limit that would otherwise apply for 2024 (the amount will be indexed in later years). The increase also applies to the annual catch-up contribution limit. Employees with between 26 and 100 employees with at least $5,000 in compensation may elect to apply the increased limits if they provide additional employer contributions (either a 4% matching contribution or a 3% employer contribution).
A SIMPLE 401(k) plan must satisfy a universal availability requirement for availability of catch-up contributions ( Q 3761).8
Under the matching formula option for SIMPLE 401(k) plans, the employer must match employee salary deferral contributions dollar-for-dollar up to 3 percent of the employee's compensation.9 (Earlier guidance stated that matching of catch-up contributions was not required.)10
Under the second option, the employer makes a contribution of 2 percent of compensation on behalf of each employee who is eligible to participate and who has at least $5,000 in compensation from the employer for the year, provided notice of the election is given prior to the 60 day election period.11
Under SECURE Act 2.0, beginning in 2024, employers may make additional nonelective contributions to all eligible employees with at least $5,000 in compensation from the employer for the year. The additional contributions must be established as a uniform percentage of compensation. The contribution cannot exceed the lesser of (1) 10% of the employee's compensation or (2) $5,000 per participant (the amount will be indexed for inflation).
The plan also must provide that no other contributions (other than rollover contributions) may be made to the plan other than those described above.12 This is the "exclusive plan requirement." This requirement is met if no contributions were made, or no benefits accrued, for services during the year under any qualified plan of the employer on behalf of any employee eligible to participate in the cash or deferred arrangement, other than the contributions made to the SIMPLE 401(k) plans.13 The receipt of a reallocation of forfeitures under another plan of the employer will not cause a SIMPLE 401(k) participant to violate this requirement.14
All contributions to a SIMPLE 401(k) plan must be nonforfeitable.15
Employees generally must have the right to terminate participation at any time during the year, although the plan may preclude the employee from resuming participation until the beginning of the next year.16 Furthermore, each employee eligible to participate must have 60 days before the first day of any year (and 60 days before the first day the employee is eligible to participate) to elect whether to participate in the plan or to modify his or her deferral amount. The foregoing requirements are met only if the employer notifies each eligible employee of such rights within a reasonable time before the 60 day election period.17
A SIMPLE 401(k) plan that meets the requirements set forth in IRC Section 401(k)(11) is not subject to the top-heavy rules ( Q 3917) provided that the plan allows only the contributions required under IRC Section 401(k)(11).18 SIMPLE 401(k) plans are subject to the other qualification requirements of a 401(k) plan, including the $350,000 compensation limit (as indexed for 2025 projected), $345,000 for 2024), the IRC Section 415 limits ( Q 3728, Q 3868), and the prohibition on state and local governments operating a 401(k) plan ( Q 3753).19 The IRC Section 404(a) limit on the deductibility of contributions to 25 percent of compensation ( Q 3750) is increased in the case of SIMPLE 401(k) plans to the greater of 25 percent of compensation or the amount of contributions required under IRC Section 401(k)(11)(B).20
1. IRC § 401(k)(11); Treas. Reg. § 1.401(k)-4(a).
2. IRC §§ 401(k)(11)(D)(i), 408(p)(2)(C)(i).
3. IRC §§ 408(p)(10), 401(k)(11)(D)(i), 408(p)(2)(C)(i)(II); Treas. Reg. § 1.401(k)-4(b)(2).
4. IRC §§ 401(k)(11)(A), 401(k)(11)(D)(i).
5. IRC § 401(k)(11)(B); Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-75.
6. IRC § 414(v).
7. IRC § 414(v)(2)(A); Notice 2017-64, Notice 2018-83, Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-75.
8. IRC § 414(v)(3)(B); Treas. Reg. § 1.414(v)-1(e).
9. Treas. Reg. § 1.401(k)-4(e)(3).
10. REG-142499-01, 66 Fed. Reg. 53555 (Oct. 23, 2001).
11. IRC § 401(k)(11)(B)(ii); Treas. Reg. § 1.401(k)-4(e)(4).
12. IRC § 401(k)(11)(B)(i)(III); Treas. Reg. § 1.401(k)-4(e)(1).
13. IRC § 401(k)(11)(C); Treas. Reg. § 1.401(k)-4(c).
14. Treas. Reg. § 1.401(k)-4(c)(2).
15. IRC § 401(k)(11)(A)(iii).
16. Treas. Reg. § 1.401(k)-4(d)(2)(iii).
17. IRC §§ 401(k)(11)(B)(iii), 408(p)(5)(B), 408(p)(5)(C); Treas. Reg. § 1.401(k)-4(d)(3).
18. IRC § 401(k)(11)(D)(ii); Treas. Reg. § 1.401(k)-4(h).
19. Rev. Proc. 97-9, 1997-1 CB 624; Notice 2023-75.
20. IRC § 404(a)(3)(A)(ii).