SIMPLE IRA vs. 401(k) for a Small Business, and When It's Worth Switching

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Can I put away more than this?

Maureen asked it in September, with her CPA on speaker. Maureen is made up, though some version of this call lands here every fall. She runs a veterinary clinic in Delaware, nine people on payroll besides her, and she started a SIMPLE IRA in 2019 because it took an afternoon to open and costs her nothing to administer.

It still costs her nothing to administer. In 2026 it also stops her own savings at $18,100, where a 401(k) would let her put in $24,500 and keep going from the company side.

What a SIMPLE IRA is

Every employee gets an IRA in their own name, and the company runs their deferrals through payroll into it. There is no plan document to maintain, no nondiscrimination testing, and no annual return to file.

The formula comes with it. The business owes a company contribution every year, either a match of up to 3% of pay or 2% of pay to everyone eligible, and that money is the employee's the moment it lands. A hundred employees is the ceiling on who can run one, and a SIMPLE is the only retirement plan the business is allowed to have.

That package is why a SIMPLE is a good first plan. It is also why it stops being the right one.

Where Maureen's ceiling sits

Maureen pays herself $220,000 on a W-2. Her SIMPLE lets her defer $18,100, since a business her size gets the higher SIMPLE limit without asking for it, and her 3% match adds $6,600. That is $24,700 into her account for the year, and there is no next step.

A 401(k) starts her at $24,500. Add a safe harbor match that tops out at 4% of pay and she is at $33,300, against a 2026 limit of $72,000 on everything going into one person's account. That leaves $38,700 of room for profit sharing, and reaching the top of it means putting money in for her staff too.

What a 401(k) lets a business change

The ceiling is what gets an owner on the phone. After that it comes down to how much of the plan a business can set for itself.

Who has to be in it. A SIMPLE covers anyone who earned $5,000 in any two prior years and looks likely to earn it again, and the employer cannot add a single condition beyond that. A 401(k) can require age 21 and a year of service, which changes what a seasonal hire costs.

Who keeps the company's money. Profit sharing can carry a vesting schedule, up to six years graded or three on a cliff, and what someone forfeits by leaving early stays in the plan for the people who stay. Safe harbor contributions vest right away, the same as a SIMPLE's.

Whether to contribute at all this year. A safe harbor match is a yearly commitment, the way a SIMPLE's contribution is. Profit sharing sits on top of it and stays discretionary, so Maureen decides each December whether to fund it.

What comes next. Because a SIMPLE has to be the only plan, it closes off anything built on top of it, including a cash balance plan stacked on profit sharing. It also expires: pass 100 employees and the plan gets two more calendar years before it has to go. A 401(k) is the plan a business is still running at 40 people and at 400.

Common myths about moving to a 401(k)

Myth: a SIMPLE is less work for me. Either way the deferrals run through payroll and somebody else administers the plan. The 401(k) adds a plan document and a Form 5500, and the third party administrator handles both.

Myth: a 401(k) locks me into paying out more. A SIMPLE already requires a company contribution every single year. A safe harbor match is that same commitment at a comparable percentage of pay, and everything above it is the owner's call.

Myth: we're too small for a 401(k). There is no minimum headcount, and plans get set up for a single owner with no employees. The SIMPLE is the one with a size rule, and it is a maximum.

Myth: I would have to wait until January. That was true until 2024, when SECURE 2.0 let a business terminate its SIMPLE partway through a year as long as a safe harbor 401(k) takes its place.

What the switch costs her

A plan document, a third party administrator, recordkeeping, and a Form 5500 every year. Nondiscrimination testing comes with it unless the plan is safe harbor, and Maureen's pay puts her over the $160,000 highly compensated line for 2026, which is where testing starts to bite. A safe harbor design removes it. We cover what a 401(k) costs a small business in its own post, and the federal startup credits do not break the tie, since the law counts a SIMPLE as a qualified employer plan too.

How the switch happens

The company takes formal written action setting a termination date and tells employees at least 30 days before it. Deferrals for that transition year are capped at a blend of the two plans' limits, weighted by the days each plan ran, and the required SIMPLE match still applies to pay through the termination date. That is the whole procedure.

Where Maureen landed

She moved to a safe harbor 401(k), with profit sharing she looks at every December and a one-year wait before new hires come in. Her own number went from $24,700 to $33,300 before she put a dollar of profit sharing in, and the room above that is hers to use as the clinic allows.

A SIMPLE would still be the right call for an owner nowhere near the ceiling who wants the least administration available. Maureen ran one for six years and it was the right plan for five of them. What changed was her own number, and that is usually what moves this decision.

Austin Wolfe and Joe Anderson run Workplace Retirement at ClearMind Capital in Columbus, and set up and administer 401(k) plans for businesses across Ohio and nationwide. Book a call and we will price both designs against your own census, so you can see your number next to your crew's before anything changes.

Common questions

Which one lets me save more, a SIMPLE IRA or a 401(k)?

The 401(k), for anyone contributing near the top. For 2026 the employee limit is $24,500 in a 401(k) against $17,000 in a SIMPLE, or $18,100 at a business with 25 or fewer employees. Counting company money, one person's 401(k) account can receive $72,000 for the year, and a SIMPLE has no comparable second layer.

Can a business have a SIMPLE IRA and a 401(k) at the same time?

No. An employer running a SIMPLE IRA cannot maintain another retirement plan covering the same employees for that year. This is the rule that forces the choice, and it is why the mid-year replacement route exists.

What does the employer have to contribute to a SIMPLE IRA?

One of two things, every year: a match of up to 3% of pay for employees who defer, or 2% of pay for every eligible employee whether they defer or not. A business with 26 to 100 employees that wants the higher deferral limit has to raise those to 4% and 3%, and elect it in writing before the annual employee notice.

Can I make employees wait before they join the plan?

In a 401(k), up to age 21 and a year of service, with a separate rule bringing in part-time employees who work at least 500 hours over two consecutive years. A SIMPLE cannot add any condition beyond its own test, which is $5,000 of pay in any two prior years and a reasonable expectation of $5,000 this year.

Written byAustin Wolfe & Joe AndersonClearMind Capital | Workplace RetirementView bio →

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