SIMPLE IRA vs 401(k): Which retirement plan is right for your business?

Retirement plans aren’t just a checkbox for compliance — they’re a cornerstone of building a financially secure and motivated workforce.

However, choosing the right one can be overwhelming, especially when the decision impacts your team’s long-term financial health.

In this article, we’ll look at two of the most popular options: the SIMPLE IRA, and the 401(k). We’ll break down their pros and cons and their key differences, enabling you to make a more informed decision tailored to your needs.

What is a SIMPLE IRA?

A Savings Incentive Match Plan for Employees — or SIMPLE — IRA is designed for small businesses with 100 or fewer employees. It offers a straightforward way for both you and employees to contribute to retirement savings without the complexity of a traditional retirement plan.

The key features of a SIMPLE IRA are as follows:

• Eligibility: Small businesses with 100 or fewer employees qualify.

• Employer contributions: Employers must contribute either a dollar-for-dollar match of employee contributions up to 3% of their salary, or a flat 2% of each eligible employee’s salary, regardless of participation.

• Contribution limits: Employees can contribute up to $15,500 annually (as of 2024), with a catch-up contribution of $3,500 for those aged 50 or older.

SIMPLE IRAs are generally easier and cheaper to establish than 401(k) plans, and have no annual filing requirements or nondiscrimination tests. As a result, they are seen as an ideal option for small businesses looking to offer retirement benefits without high costs.

What is a 401(k)?

A 401(k) is a tax-advantaged retirement savings plan that provides employers and employees with more flexibility (and higher contribution limits) than a SIMPLE IRA. Available to businesses of all sizes, 401(k) plans are often used as a key strategy to attract and retain top talent.

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The key features of a 401(k) are as follows:

• Flexibility: As an employer, you can choose whether to contribute (and how much).

• Higher contribution limits: Employees can contribute up to $23,000 annually (as of 2024), with a catch-up contribution of $7,500 for those aged 50 or older.

• Customizable options: You can design your plan to include loan options, profit-sharing, and vesting schedules.

Higher contribution limits mean that your people can save more for retirement, making it popular among employees.

It also enables you to tailor a plan that more conveniently meets your business’ needs, and is suitable for companies of all sizes — especially if you plan to scale.

How to choose the right plan for your business

Selecting the right retirement plan is a pivotal decision that can affect your company’s financial health, employee satisfaction, and growth potential. To make a decision, consider the following steps:

1. Evaluate your business size and needs

The size of your business plays a significant role in determining the right plan. As mentioned, SIMPLE IRAs are tailored for small businesses with 100 or fewer employees. It’s designed to minimize complexity, making it an attractive option for startups or small organizations with limited administrative capacity.

If your company exceeds 100 employees — or if you anticipate rapid growth — a 401(k) plan provides the scalability to support a larger workforce. It also signals a commitment to competitive employee benefits, which can attract top talent in larger industries.

Pro tip: If you’re a small business planning to expand, starting with a SIMPLE IRA might make sense initially, but transitioning to a 401(k) as your team grows could better accommodate future needs.

2. Assess your administrative resources and costs

Retirement plans come with different levels of administrative complexity and costs. SIMPLE IRAs require minimal paperwork and do not involve annual compliance testing (or extensive IRS filings). As a result, they’re ideal if you lack a dedicated HR or finance team to manage intricate benefits.

Conversely, 401(k)s come with additional administrative requirements, including annual nondiscrimination testing to ensure fairness and IRS filings like Form 5500. You will need to budget for these administrative tasks, or consider outsourcing to a third-party administrator.

3. Think about employer contributions

Consider your willingness — and ability — to make mandatory contributions.

In a SIMPLE IRA, employer contributions are non-negotiable. You must either match your employees’ contributions (up to 3% of their salary), or provide a 2% non-elective contribution for all eligible employees. While this option is simpler, it limits your flexibility.

In a 401(k), employer contributions are optional, although they are highly recommended to enhance the plan’s attractiveness. You can choose matching structures or profit-sharing options that align with your financial goals.

If you prefer flexibility in how and when to contribute, a 401(k) gives you more control.

4. Align with employee expectations

Understanding your team’s financial needs and career goals can also help guide your choice.

For instance, if your workforce skews younger, your employees may value higher contribution limits and employer matches, making a 401(k) more appealing.

For smaller teams (or if your business has a high turnover due to seasonality), a SIMPLE IRA provides an easier way to ensure everyone has access to a retirement plan without high costs.

It’s a good idea to survey your employees to identify their priorities, as this feedback can inform the best decision for both parties.

5. Consider industry trends and competitive edge

In competitive industries like tech, consulting, or professional services, offering a robust retirement plan can set your business apart.

A 401(k) demonstrates your commitment to employee financial wellness, giving you an edge when recruiting and retaining high-performing talent.

SIMPLE IRAs, meanwhile, are more common in small businesses or industries where employees prioritize other types of benefits over retirement savings.

It’s advisable to research your competitors’ benefits packages to ensure your offerings are aligned with — or exceed — industry standards.

How can Remote help?

When you hire through Remote’s employer of record (EOR) service, we can help you choose the most suitable retirement plan for you and your employees, based on your budget and your requirements.

We also set up and manage the benefits on your behalf, saving you time and resources. This includes payroll management, where we will ensure all the right contributions are being made accurately and promptly, in full compliance with federal and state laws.

To learn more about how we can help you offer and manage top class benefits, speak to one of our friendly experts today.