The simple 401(k) plan for small businesses

401(k) plans are a popular option for small businesses because of the flexibility they offer.

Employee taking notes at a meeting.

With Simply Retirement by Principal®, you’ll get that flexibility and more. Our 401(k) plan solution is designed to make plan management easy for you while providing a way for your employees to save for their retirement.

Why consider a 401(k) plan?

A 401(k) plan is a valuable employee benefit that can help you recruit and retain top talent. It’s also an effective way to help your employees save for the future.

What’s a 401(k) plan?

401(k) plans allow employees to set aside a portion of their compensation. Business owners can make contributions to the employees' retirement plans.

Normally, a 401(k) plan is designed to help employees maximize their retirement savings by deferring the payment of income taxes until they withdraw the money in retirement. Roth contributions, however, are another option that allows employees to pay taxes before contributing to their retirement so they don’t have to pay taxes when they withdraw the money as long as distribution requirements are met.

A 401(k) plan offers the flexibility to design a plan with:
  • Tax benefits for your business and your employees
  • Pre-tax salary deferrals
  • Profit sharing with the option to offer matching contributions
  • The option for your employees to request a loan from their 401(k) plan balance
  • Convenient automatic payroll deductions for employee contributions

Tax credits are available for small businesses just starting a new retirement plan.

New SECURE Act legislation could help offset some of your plan start-up costs.

The SECURE Act allows small businesses with fewer than 100 employees to claim a tax credit of 50% of the qualifying start-up costs for a new employee retirement plan (up to $5,000 per tax year for the first three years)*. There’s also an extra tax credit of up to $500 tax year for the first three years for adopting automatic enrollment *, which is a feature of the Simply Retirement by Principal® 401(k) plan. Plus, any matching contributions you make to employee retirement accounts are tax-deductible. See your tax advisor for guidance on how these credits may apply.

Advantages of a Simply Retirement by Principal® 401(k) plan

Consistent flat fee

Business owners pay the same flat recordkeeping fee, so you don’t have to worry about pricing that goes up as your plan assets grow or wonder if you’re getting the same rate as others.

Completely online

You can make all of your plan design selections, sign forms, add employees, and manage contributions in one central online location—when and where it’s convenient for you. And if you have questions, help is just a phone call away.

Payroll provider integration

Ubiquity Retirement + Savings® supports integrations with select payroll providers like Paychex, ADP, and QuickBooks, helping business owners save time and reduce errors by automating contribution reporting.

How does a 401(k) plan compare to other retirement plans?

If you’re looking for a workplace retirement plan, a 401(k) plan isn’t your only option. See how it compares to other plan types below. This is just an overview, so talk to your financial professional if you’d like more details about each plan option and how they might fit your needs.

Simply Retirement by Principal® 401(k) plan
401(k) plan

401(k) plans allow employees to set aside a portion of their compensation and also allow business owners to make contributions to the employee’s retirement plan if they choose. Loans can be allowed, providing flexibility for employees. Normally, a 401(k) is designed to help employees save for their retirement where they won't pay taxes until they withdraw the money in retirement. Roth contributions, however, are another option that allows employees to pay taxes before contributing to their retirement so they don't have to pay taxes when they withdraw the money as long as distribution requirements are met.

403(b) plan

A 403(b) plan is like a 401(k) plan; however, 403(b) plans are used by tax-exempt businesses, religious organizations, school districts, and governmental organizations. The law allows these organizations to be exempt from certain administrative processes that apply to 401(k) plans.

SEP IRA

A Simplified Employee Pension (SEP) Individual Retirement Account (IRA) allows self-employed individuals or small business owners to save toward retirement. Business owners who have employees are required to contribute on the employee’s behalf. Roth contributions (after-tax contributions that grow tax-free) and participant loans are not available.

SIMPLE IRA

A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a simpler version of a 401(k) plan that works like a traditional IRA (Individual Retirement Account). Business owners are required to contribute to the plan, regardless of the employee participation and participant loans are not available. Roth contributions, however, are another option that allows employees to pay taxes before contributing to their retirement so they don't have to pay taxes when they withdraw the money.

Defined Benefit (Pension) Plan

A defined benefit (or pension) plan is a form of retirement plan in which the business owner sets aside money for their employee while they are working to provide them with guaranteed monthly income in retirement. Money will then be paid out to the employee, usually on a monthly basis, after they have retired. Employees cannot contribute additional money. A formula is used to determine how much the business owner will contribute to a pension plan.

Number of employees
Simply Retirement by Principal® 401(k) plan
Fewer than 100
401(k) plan
Any
403(b) plan
Any
SEP IRA
Any
SIMPLE IRA
100 or less
Defined Benefit (Pension) Plan
Any
Employees who will benefit
Simply Retirement by Principal® 401(k) plan
All
401(k) plan
All or Select
403(b) plan
All or Select
SEP IRA
All
SIMPLE IRA
All
Defined Benefit (Pension) Plan
All or Select
Applicable for tax-exempt and religious organizations, school districts, etc.

A 403(b) plan is only available to:

  • Employees of tax-exempt organizations established under section 501(c)(3)
  • Employees of public school systems who are involved in the day-to-day operations of a school
  • Employees of cooperative hospital service organizations
  • Civilian faculty and staff of the Uniformed Services University of the Health Sciences
  • Employees of public school systems organized by Indian tribal governments
  • Certain ministers (see irs.gov for criteria)
Simply Retirement by Principal® 401(k) plan

401(k) plan
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403(b) plan
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SEP IRA

SIMPLE IRA
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Defined Benefit (Pension) Plan
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Employees can contribute before being taxed

This allows employees to defer paying income taxes until they start to withdraw the money in retirement. This also lowers their taxable income for their current payroll.

Simply Retirement by Principal® 401(k) plan
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401(k) plan
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403(b) plan
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SEP IRA

SIMPLE IRA
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Defined Benefit (Pension) Plan

Employees can contribute after being taxed

This allows employees to pay income taxes now and not when they start to withdraw the money in retirement as long as distribution requirements are met. This could be beneficial if your employee expects to have a higher monthly income during retirement.

Simply Retirement by Principal® 401(k) plan
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401(k) plan
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403(b) plan
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SEP IRA

SIMPLE IRA

Defined Benefit (Pension) Plan

Business owner required to contribute

There is a minimum amount that your business would be required to contribute to your employees’ retirement.

Simply Retirement by Principal® 401(k) plan

401(k) plan

403(b) plan

SEP IRA

SIMPLE IRA
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Defined Benefit (Pension) Plan
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Safe harbor plan option available

Safe harbor is just a type of 401(k) plan that allows you to bypass some of the compliance testing required by the IRS to make sure the plan is fair. In return, you’re required to help your employees save for retirement by making matching contributions to their 401(k) accounts. With safe harbor, you’ll contribute more money, but there’s less paperwork and administrative hassle. With a non-safe harbor plan, you have the option to contribute less, but you can’t bypass compliance testing required by the IRS. For more details, check out our safe harbor resource page.

*Eligible employees must be notified prior to plan start date.

Simply Retirement by Principal® 401(k) plan
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401(k) plan
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403(b) plan
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SEP IRA

SIMPLE IRA

Defined Benefit (Pension) Plan

Employees can borrow from account

A loan provides the ability to withdraw funds from your retirement account early but it will need to be paid back based on plan terms. Money is taxed again when withdrawn in retirement, so those who take out a loan are subjecting themselves to double taxation.

Simply Retirement by Principal® 401(k) plan
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401(k) plan
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403(b) plan
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SEP IRA

SIMPLE IRA

Defined Benefit (Pension) Plan

Employees can withdraw for hardship

A hardship withdrawal is an emergency withdrawal of funds from a retirement plan due to what the IRS calls “an immediate and heavy financial need.” There are certain criteria for why the funds are needed and their amount in order to avoid penalty, but, even if penalties are waived, the withdrawal will still be subject to standard income tax.

Simply Retirement by Principal® 401(k) plan

401(k) plan
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403(b) plan
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SEP IRA

SIMPLE IRA

Defined Benefit (Pension) Plan

Vesting schedule

A vesting schedule is the time frame it takes for employees to own the assets that a business owner contributes to the employee's retirement plan. This is determined by the business owner and may be used as a retainment incentive.

Simply Retirement by Principal® 401(k) plan

100% vested immediately

401(k) plan
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403(b) plan
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SEP IRA

SIMPLE IRA

Defined Benefit (Pension) Plan
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Automatic enrollment

Automatic enrollment is a plan provision which automatically enrolls participants into the retirement plan at a specified pre-tax salary deferral percentage. This can help increase participation, simplify administration, and help employees save for retirement. Participants in the Simply Retirement by Principal® 401(k) plan are automatically enrolled, but can change their contribution details or opt out at any time.

Simply Retirement by Principal® 401(k) plan
Required
401(k) plan
Optional
403(b) plan
Optional
SEP IRA

SIMPLE IRA

Defined Benefit (Pension) Plan

Rollovers

A rollover is when you transfer the money in your retirement account to a new plan or IRA. The IRS gives you 60 days from the date you receive an IRA or retirement plan distribution to roll it over to another plan or IRA. You’re allowed only one rollover per 12-month period from the same IRA. This one-rollover-per-IRA limit doesn’t apply to plan-to-plan rollovers and some other types of rollovers.

Simply Retirement by Principal® 401(k) plan
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401(k) plan
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403(b) plan
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SEP IRA
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SIMPLE IRA
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Defined Benefit (Pension) Plan
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Employee contribution limits
Simply Retirement by Principal® 401(k) plan
*
401(k) plan
*
403(b) plan
*
SEP IRA

N/A

SIMPLE IRA
*
Defined Benefit (Pension) Plan

Investment options
Simply Retirement by Principal® 401(k) plan

Any acceptable investment under the plan

401(k) plan

Any acceptable investment under the plan

403(b) plan

Only mutual funds and annuities

SEP IRA

Individual stocks, bonds, mutual funds, ETFs, and others

SIMPLE IRA

Individual stocks, bonds, mutual funds, ETFs, and others

Defined Benefit (Pension) Plan

Any acceptable investment under the plan

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See if our 401(k) plan fits your needs

Intended for plan sponsor use.

*Up to $5,000 per tax year for the first three years:50% of the qualified startup costs paid or incurred, but limited to the greater of (1) $500 or (2) the lesser of (a) $250 for each non-highly compensated employee who is eligible to participate in the plan or (b) $5,000. Qualified startup costs (1) In general “qualified startup costs” is ordinary and necessary expenses of an eligible employer which are paid or incurred in connection with – the establishment or administration of an eligible employer plan, or (ii) the retirement-related education of employees with respect to such plan. (2) Plan must have at least 1 participant: would not apply if plan does not have at least 1 employee eligible to participate who is not a highly compensated employee. Information about the SECURE Act is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

*Automatic enrollment: Automatic enrollment is a plan provision which automatically enrolls participants into the retirement plan at a specified pre-tax salary deferral percentage. This can help increase participation, simplify administration, and help employees save for retirement. Participants in the Simply Retirement by Principal® 401(k) plan are automatically enrolled, but can change their contribution details or opt out at any time. This credit is for plans that include the eligible automatic contribution arrangement (EACA) feature only.

*19,500: Up to $26,000 for employees age 50 or older. Amounts are for the 2020 tax year.

*19,500: Up to $26,000 for employees age 50 or older. Amounts are for the 2020 tax year.

*19,500: Up to $26,000 for employees age 50 or older. An employee of a “qualified organization” with 15 years of service may be eligible to contribute an additional $3,000. Amounts are for the 2020 tax year.

*13,500: Up to $16,500 for employees age 50 or older; can’t exceed 100% of compensation. Amounts are for the 2020 tax year