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SIMPLE 401(k) (Individual)

Employees can use this streamlined employer-sponsored retirement plan to make salary-deferral contributions on a pretax basis.

Commonly referred to as SIMPLE 401(k) plan and SIMPLE employer-sponsored retirement plan.

Do I Qualify for a SIMPLE 401(k) (Individual)?

Employees can use a SIMPLE 401(k) offered by their employer to invest pretax dollars and defer taxes on the deposits until retirement.

2022 SIMPLE 401(k) (Individual) Details

SIMPLE (short for “Savings Incentive Match Plans for Employees of Small Employers”) 401(k) plans allow employees to set aside pretax dollars in retirement accounts that can grow tax-free until distributions are made, after the owner reaches a certain age. If you take a distribution from the plan before you reach age 59½, you may have to pay an additional 10% tax on the amount you receive.

SIMPLE 401(k) Contributions

The amount you can contribute to a SIMPLE 401(k)s is subject to an inflation-adjusted annual limit. For 2021, the contribution limit is $13,500, which will increase to $14,000 in 2022. Employees older than 50 can make additional catch-up contributions.

Employers must make a contribution, but they have options in how to calculate the amount that they contribute. Your employer can either:

• Match your contribution in an amount between 1% and 3% of your compensation, or
• Make a nonelective contribution of 2% of salary to all employees, regardless of whether the employees contribute

All contributions made to these accounts, including your employer's matching amounts, are 100% vested from the start.

Required Employer Communications

Every year, your employer must provide you with an update on the status of the plan. That notice must be delivered to you before the start of the annual election period (typically the 60 days before January 1, with some exceptions), and it must include:

• A description of your opportunity to make or modify salary reduction changes under the plan
• Notice of the employer’s plan to make either matching or nonelective contributions
• A summary description of the plan provided by the financial institution
• Written notice that your balance can be transferred without cost or penalty if you use a designated financial institution

SIMPLE 401(k) (Individual)

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• The plan is not subject to the nondiscrimination rules that apply to traditional 401(k) plans.
• Contributions and gains are not subject to income taxes until distributed from the plan.
• Employees are fully vested in all contributions.
• A straightforward benefit formula allows for easy administration.
• Optional participant loans and hardship withdrawals add flexibility for employees.


• No other retirement plans can be maintained.
• Withdrawal and loan flexibility adds administrative burden for the employer.
• Distributions from the 401(k) are treated as ordinary income and may be subject to an additional 10% penalty if taken before age 59½.

Assumptions When Taking the SIMPLE 401(k) (Individual)

• The employer wishes to make a 3% contribution to all eligible employees.
• All employees are capped at the maximum annual compensation limit.

Conflicting Strategies

SIMPLE IRA (Individual)
Traditional 401(k) (Individual)
Roth 401(k)
Solo 401(k) (Individual)

Requirements to Claim the SIMPLE 401(k) (Individual)

• Your employer must create the SIMPLE 401(k) plan in order for you to participate.
• Your employer must have 100 or fewer employees.
• Your employer cannot have any other retirement plans.

Business Entities That Can Claim the SIMPLE 401(k) (Individual)

• Individual

The material discussed on this page is meant for general illustration and/or informational purposes only and is not to be construed as investment, tax, or legal advice. You must exercise your own independent professional judgment, recognizing that advice should not be based on unreasonable factual or legal assumptions or unreasonably rely upon representations of the client or others. Further, any advice you provide in connection with tax return preparation must comply in full with the requirements of IRS Circular 230.

Prosperity Tax Advisors
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